UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-9595
________________________________
BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-0907483 | |
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) | |
7601 Penn Avenue South Richfield, Minnesota | 55423 (Zip Code) | |
(Address of principal executive offices) | ||
Registrant's telephone number, including area code 612-291-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $.10 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) o Yes x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 2, 2014, was approximately $6.4 billion, computed by reference to the price of $29.17 per share, the price at which the common equity was last sold on August 2, 2014, as reported on the New York Stock Exchange-Composite Index. (For purposes of this calculation all of the registrant's directors and executive officers are deemed affiliates of the registrant.)
As of March 23, 2015, the registrant had 352,185,626 shares of its Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated on or about April 28, 2015 (to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year-end of January 31, 2015), for the Regular Meeting of Shareholders to be held on June 9, 2015 ("Proxy Statement"), are incorporated by reference into Part III.
CAUTIONARY STATEMENT PURSUANT TO THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Annual Report on Form 10-K are forward-looking statements and may be identified by the use of words such as "anticipate," "assume," "believe," "estimate," "expect," "intend," "foresee," "outlook," "plan," "project," and other words and terms of similar meaning. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our future results to differ materially from the anticipated results expressed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of this Annual Report on Form 10-K for a description of important factors that could cause our future results to differ materially from those contemplated by the forward-looking statements made in this Annual Report on Form 10-K. Our forward-looking statements speak only as of the date of this report or as of the date they are made, and we undertake no obligation to update our forward-looking statements.
BEST BUY FISCAL 2015 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.
Unless the context otherwise requires, the use of the terms "we," "us" and "our" in this Annual Report on Form 10-K refers to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries. Any references to our website addresses do not constitute incorporation by reference of the information contained on the websites.
Description of Business
We were incorporated in the state of Minnesota in 1966 as Sound of Music, Inc. Today, we are a leading provider of technology products, services and solutions. We offer expert service at unbeatable price more than 1.5 billion times a year to the consumers, small business owners and educators who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have retail and online operations in the U.S., Canada and Mexico.
Information About Our Segments and Geographic Areas
We have two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S., operating e-commerce, retail store and call center operations under various brand names including, but not limited to, Best Buy (bestbuy.com), Best Buy Mobile, Geek Squad, Magnolia Audio Video and Pacific Sales. We operate Best Buy Mobile stores-within-a-store and offer Geek Squad services in all of our U.S. Best Buy stores. In addition, we operate Magnolia Home Theater, Magnolia Design Center and Pacific Kitchen and Home store-within-a-store experiences in select U.S. Best Buy stores, which we believe further enhance the range of product offerings and quality of expert customer service.
On February 1, 2014, we sold mindSHIFT Technologies, Inc. ("mindSHIFT"). We had previously acquired mindSHIFT, a managed service provider for small and mid-sized businesses, in fiscal 2012.
The International segment is comprised of: (i) all Canada operations, operating e-commerce and retail store operations under the brand names Best Buy (bestbuy.ca), Best Buy Mobile, Cell Shop, Future Shop (futureshop.ca) and Geek Squad; and (ii) all Mexico operations, operating under the brand names Best Buy (bestbuy.com.mx), Best Buy Express and Geek Squad. We operate Best Buy Mobile store-within-a-store concepts in all Best Buy branded stores in Canada.
In March 2015, we made a decision to consolidate Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in permanently closing 66 Future Shop stores and converting 65 Future Shop stores to the Best Buy brand.
Additional information on these changes is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 13, Subsequent Events, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
In fiscal 2007, we acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. (“Five Star”), one of China’s largest appliance and consumer electronics retailers. In fiscal 2009, we acquired the remaining 25% interest in Five Star. On December 3, 2014, we entered into an agreement to sell Five Star, and we completed the sale on February 13, 2015. In fiscal 2009, we acquired a 50% controlling interest in Best Buy Europe Distributions Limited (“Best Buy Europe”), a venture with Carphone Warehouse Group plc (“CPW”). On June 26, 2013, we sold our 50% ownership interest in Best Buy Europe to CPW.
Financial information about our segments and geographic areas is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 11, Segment and Geographic Information, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Operations
Our Domestic and International segments are managed by leadership teams responsible for all areas of the business. Both segments operate a multi-channel platform that provides customers the ability to shop when and where they want, including online and in our retail stores.
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Domestic Segment
Merchandise selection, pricing and promotions, procurement and supply chain, marketing and advertising, and labor deployment across all channels are centrally managed at our corporate headquarters. In addition, support capabilities (e.g., human resources, finance and real estate management) are generally performed at our corporate headquarters. We also have field operations that support retail teams. Our retail stores have procedures for inventory management, asset protection, transaction processing, customer relations, store administration, product sales and services, staff training and merchandise display that are largely standardized within each store brand. All stores within each store brand generally operate under standard procedures with a degree of flexibility for store management to address certain local market characteristics.
International Segment
Our Canada store operations are similar to those in our Domestic segment, with centrally controlled advertising, merchandise purchasing and pricing, and inventory policies. In addition, corporate management performs support capabilities. Similar to our U.S. Best Buy stores, all Canada stores use a standardized operating system that includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and merchandise display. The retail operations include two principal store brands. Future Shop stores have predominantly commissioned sales associates, whereas employees in Best Buy branded stores in Canada, like employees in U.S. Best Buy stores, are noncommissioned.
In March 2015, we made a decision to consolidate Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in permanently closing 66 Future Shop stores and converting 65 Future Shop stores to the Best Buy brand.
Our stores in Mexico employ an operating model similar to that used in our U.S. Best Buy stores.
Merchandise and Services
Our Domestic and International segments have offerings in six revenue categories: Consumer Electronics, Computing and Mobile Phones, Entertainment, Appliances, Services and Other. Consumer Electronics consists primarily of television and home theater, digital cameras and camcorders, DVD and Blu-ray players; portable electronics such as MP3 devices, headphones and speakers, car stereo, navigation and satellite radio, and all related accessories. The Computing and Mobile Phones revenue category includes notebook and desktop computers, mobile phones and related subscription service commissions, tablets and all related accessories. The Entertainment revenue category includes video gaming hardware and software, DVDs, Blu-rays, CDs, digital downloads and computer software. The Appliances revenue category includes both large and small appliances and kitchen and bath fixtures. The Services revenue category consists primarily of extended warranty service contracts, technical support, product repair, delivery and installation. The Other revenue category includes non-core offerings such as snacks and beverages.
The merchandise and service offerings vary across our stand-alone store portfolio, with U.S. Best Buy Mobile, Magnolia Audio Video and Pacific Sales stores offering a more focused assortment.
Distribution
Domestic Segment
U.S. Best Buy online merchandise sales generally are either picked up at U.S. Best Buy stores or delivered directly to customers from a distribution center or retail store. The ship-from-store capability allows us to improve product availability and delivery times for customers. Most merchandise for our U.S. Best Buy, U.S. Best Buy Mobile, Magnolia Audio Video and Pacific Sales stores is shipped directly from manufacturers to our distribution centers or warehouses located throughout the U.S. In order to meet release dates for certain products, merchandise may be shipped directly to our stores from suppliers.
International Segment
Canada’s online merchandise sales are picked up at our stores, delivered directly to customers from a distribution center or retail store, or delivered directly to the customer from the vendor. Our Canada stores' merchandise is shipped directly from our suppliers to our Canadian distribution centers. In order to meet release dates for certain products, merchandise may also be shipped directly to our stores from suppliers.
Our stores in Mexico have distribution methods similar to that of our U.S. Best Buy stores.
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Suppliers and Inventory
Our Domestic and International segments purchase merchandise from a variety of suppliers. In fiscal 2015, our 20 largest suppliers accounted for approximately 73% of the merchandise we purchased, with 5 suppliers – Apple, Samsung, Hewlett-Packard, Sony and LG Electronics – representing approximately 47% of total merchandise purchased. We generally do not have long-term contracts with our major suppliers that require them to continue supplying us with merchandise.
We carefully monitor and manage our inventory levels to match quantities on hand with consumer demand as closely as possible. Key elements to our inventory management process include the following: continuous monitoring of historical and projected consumer demand, continuous monitoring and adjustment of inventory receipt levels, agreements with vendors relating to reimbursement for the cost of markdowns or sales incentives and agreements with vendors relating to return privileges for certain products.
We also have a global sourcing operation to design, develop, test and contract-manufacture our own line of exclusive brand products.
Store Development
We had over 1,700 large and small-format stores at the end of fiscal 2015 throughout our Domestic and International segments. We believe this store footprint represents an advantage that we can leverage as we continue to transform our business. In the U.S., we have the ability to ship from all of our Best Buy stores, and we have opened a number of vendor store-within-a-store concepts to better leverage our square footage. In fiscal 2016 and beyond, we will continue to look for opportunities to optimize our store space, renegotiating leases and selectively opening or closing locations to support our ongoing transformation.
In March 2015, we made a decision to consolidate Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in permanently closing 66 Future Shop stores and converting 65 Future Shop stores to the Best Buy brand.
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for tables reconciling our Domestic and International segment stores open at the end of each of the last three fiscal years.
Intellectual Property
We own or have the right to use valuable intellectual property such as trademarks, service marks and tradenames, including, but not limited to, Best Buy, Best Buy Mobile, Dynex, Future Shop, Geek Squad, Init, Insignia, Magnolia, Modal, My Best Buy, Pacific Sales, Rocketfish, and our Yellow Tag logo.
We have secured domestic and international trademark and service mark registrations for many of our brands. We have also secured patents for many of our inventions. We believe our intellectual property has significant value and is an important factor in the marketing of our company, our stores, our products and our websites.
Seasonality
Our business, like that of many retailers, is seasonal. A higher proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico.
Working Capital
We fund our business operations through a combination of available cash and cash equivalents, short-term investments and cash flows generated from operations. In addition, our revolving credit facilities are available for additional working capital needs, for general corporate purposes and investment opportunities. Our working capital needs typically increase in the months leading up to the holiday shopping season as we purchase inventory in advance of expected sales.
Competition
Our competitors are primarily traditional store-based retailers, multi-channel retailers, internet-based businesses and vendors and mobile network carriers who offer their products directly to the consumer.
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Some of our competitors have low cost operating structures and seek to compete for sales primarily on price. In addition, in the U.S., online-only operators are exempt from collecting sales taxes in certain states. We believe this advantage will continue to be eroded as sales tax rules are re-evaluated at both the state and federal levels. We carefully monitor pricing offered by other retailers, and maintaining price competitiveness is one of our ongoing priorities. In addition, we have a price-matching policy in the U.S. that allows customers to request that we match a price offered by certain retail store and online operators. In order to allow this, we are focused on maintaining efficient operations and leveraging the economies of scale available to us through our global vendor partnerships.
In addition to price, we believe our ability to deliver a high quality customer experience offers us a key competitive advantage. We believe our dedicated and knowledgeable people, integrated online and store channels, broad product assortment, range of focused service and support offerings, distinct store formats, brand marketing strategies and supply chain are important ways in which we maintain this advantage.
Environmental Matters
Best Buy is committed to creating a thriving business while lessening our environmental impact. In the U.S., consumers recycle more electronics through Best Buy than any other retailer. In fiscal 2015, we collected more than 126 million pounds of consumer electronics and 110 million pounds of appliances, helping us meet our goal of collecting one billion pounds (set in 2009). The recycling program remains an important offering in supporting our customers, communities and the environment.
We offer a large selection of energy-efficient products, which help our customers save money by using less energy. Best Buy’s U.S. customers purchased more than 25 million ENERGY STAR® certified products in fiscal 2015 and realized utility bill savings of more than $71 million. These energy savings equate to over 900 million pounds of CO2 avoidance, or the equivalent of removing more than 86,000 cars from U.S. roads.
We are continuously working to make our locations more sustainable and to increase efficiency within our supply chain. In calendar 2010, we set a goal of reducing our absolute carbon emissions in North America by 20% by the year 2020 (over a 2009 baseline).To date, these energy efficiency measures reduced more than 200,000 metric tons of CO2 emissions and helped us to exceed our goal of 20%.
We are not aware of any federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, that have materially affected, or are reasonably expected to materially affect, our net earnings or competitive position, or have resulted, or are reasonably expected to result in, material capital expenditures. See Item 1A, Risk Factors, for additional discussion.
Number of Employees
At the end of fiscal 2015, we employed approximately 125,000 full-time, part-time and seasonal employees in the U.S., Canada, Mexico and our sourcing office in China. We consider our employee relations to be good. We offer our employees a wide array of company-paid benefits that vary within our company due to customary local practices and statutory requirements, which we believe are competitive in the aggregate relative to others in our industry.
Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). We make available, free of charge on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our website at www.investors.bestbuy.com. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov.
We also make available, free of charge on our website, our Amended and Restated By-laws, the Corporate Governance Principles of our Board of Directors ("Board") and our Code of Business Ethics (including any amendment to, or waiver from, a provision of our Code of Business Ethics) adopted by our Board, as well as the charters of all of our Board's committees: Audit Committee; Compensation and Human Resources Committee; Finance and Investment Policy Committee; and
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Nominating, Corporate Governance and Public Policy Committee. These documents are posted on our website at www.investors.bestbuy.com.
Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to Best Buy Co., Inc. Investor Relations Department at 7601 Penn Avenue South, Richfield, MN 55423-3645.
Item 1A. Risk Factors.
Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our common stock and debt instruments. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below.
We face strong competition from traditional store-based retailers, multi-channel retailers, internet-based businesses, our vendors and other forms of retail commerce, which directly affects our sales and margins.
The retail business is highly competitive. Price is of primary importance to customers and price transparency and comparability continues to increase, particularly as a result of digital technology. The ability of consumers to compare prices on a real-time basis puts additional pressure on us to maintain competitive prices to attract customers. We compete with many other local, regional, national and international retailers, as well as certain of our vendors who offer their products directly to consumers. Some of our competitors have greater market presence and financial resources than we do. The retail industry continues to experience a trend toward an increase in sales initiated online and using mobile applications, and some online-only businesses are not required to collect and remit sales taxes in all U.S. states, which can negatively impact the ability of multi-channel retailers to be price competitive. Online and multi-channel retailers are also increasing their focus on delivery services, with customers increasingly seeking faster, guaranteed delivery times and low-price or free shipping. Our ability to be competitive on delivery times and delivery cost depends on many factors, and our failure to successfully manage these factors and offer competitive delivery options could negatively impact the demand for our products. In addition, because our business strategy is based on offering superior levels of customer service utilizing a multi-channel platform, our cost structure is higher than some of our competitors. Changes in the levels of these various competitive factors may have a significant impact on consumer demand for our products and services and the margins we can generate from them.
Failure to anticipate and respond to changing consumer preferences in a timely manner could result in a decline in our sales.
Our success depends on our vendors' and our ability to successfully introduce new products, services and technologies to consumers, including, among other factors, the frequency of product and service innovations, how accurately we predict consumer preferences, the level of consumer demand, the availability of merchandise, the related impact on the demand for existing products and the competitive environment. Consumers continue to have a wide variety of choices in terms of how and where they purchase the products and services we sell. Failure to accurately predict and adapt to constantly changing technology and consumer preferences, spending patterns and other lifestyle decisions, could have a material adverse effect on our revenues and results of operations.
Macroeconomic pressures in the U.S. and key international markets could adversely affect consumer spending and our financial results.
Some of our products and services are viewed by some consumers to be discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macroeconomic conditions that impact consumer spending. Consumer confidence, employment levels, oil prices, interest rates, tax rates, availability of consumer financing, housing market conditions, and costs for items such as fuel and food, can adversely affect consumers' demand for the products and services that we offer. Our future results could be significantly adversely impacted by these factors.
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If we fail to attract, develop and retain qualified employees, including employees in key positions, our business and operating results may be harmed.
Our performance is highly dependent on attracting and retaining qualified employees, including our senior management team and other key employees. Our strategy of offering high quality services and assistance for our customers requires a highly trained and engaged workforce. The turnover rate in the retail industry is relatively high, and there is an ongoing need to recruit and train new employees. Factors that affect our ability to maintain sufficient numbers of qualified employees include employee morale, our reputation, unemployment rates, competition from other employers and our ability to offer appropriate compensation packages. Our inability to recruit a sufficient number of qualified individuals or failure to retain key employees in the future may impair our efficiency and effectiveness and our ability to pursue growth opportunities. In addition, a significant amount of turnover of senior management employees with specific knowledge relating to us, our operations and our industry may negatively impact our operations.
Consumer demand for the products and services we sell could decline if we fail to maintain positive brand perception and recognition.
We operate a portfolio of brands with a commitment to customer service and innovation. We believe that recognition and the reputation of our brands are key to our success. The proliferation of web-based social media means that consumer feedback and other information about our company are shared with a broad audience in a manner that is easily accessible and rapidly disseminated. Damage to the perception or reputation of our brands could result in declines in customer loyalty, lower employee retention and productivity, vendor relationship issues, and other factors, all of which could materially affect our profitability.
Our success is dependent on the design and execution of appropriate business strategies.
We operate in a highly-competitive and ever-changing commercial environment. Our success is dependent on our ability to identify, develop and execute appropriate strategies within this environment. Our current strategy includes transformational change to many areas of our business, including our online and in-store customer experience, our distribution system, employee training and engagement, partnership with our vendors, retail execution, services and cost control. We may experience challenges in achieving the goals we have set, and it is possible that our strategies may prove to be ineffective and that we may need to make substantial changes to them in future periods. It is also possible that we will be unsuccessful in executing our strategies, that the strategies we will implement expose us to additional risks or that strategies that have been successful in the past will fail to produce the desired results. Our results could be materially adversely affected if we fail to design and execute appropriate strategies. The market value of our common stock and debt instruments could be materially adversely affected if investors are uncertain about the appropriateness of our strategies or our ability to execute them.
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information regarding our strategies.
Failure to effectively manage our property portfolio may negatively impact our operating results.
Effective management of our large property portfolio is critical to our success. We primarily secure properties through operating leases with third-party landlords. If we fail to negotiate appropriate terms for new leases we enter into, we may incur lease costs that are excessive and cause operating margins to be below acceptable levels. We may also make term commitments that are too long or too short, without the option to exit early or extend. The availability of suitable new property locations may also hinder our ability to maintain or grow our operations. Factors such as the condition of local property markets, availability of lease financing, taxes, zoning and environmental issues, and competitive actions may impact the availability for suitable property.
We have closed stores, and we may close additional stores or other facilities in the future. For leased property, the financial impact of exiting a property can vary greatly depending on, among other factors, the terms of the lease, the condition of the local property market, demand for the specific property, our relationship with the landlord and the availability of potential sub-lease tenants. It is difficult for us to influence some of these factors. If these factors are unfavorable to us, then the costs of exiting a property can be significant. When we enter into a contract with a tenant to sub-lease property, we remain at risk of default by the tenant and the impact of such defaults on our future results could be significant.
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Failure to effectively manage our costs could have a material adverse effect on our profitability.
Certain elements of our cost structure are largely fixed in nature. Demand for our products and services is difficult to predict, which makes it more challenging for us to maintain or increase our operating income. The competitiveness in our industry and increasing price transparency mean that the focus on achieving efficient operations is greater than ever. As a result, we must continuously focus on managing our cost structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases, other store expenses or indirect spending could severely impair our ability to maintain our price competitiveness while achieving acceptable levels of profitability.
Our liquidity may be materially adversely affected by constraints in the capital markets or our vendor credit terms.
We need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance investment opportunities. Without sufficient liquidity, we could be forced to curtail our operations or we may not be able to pursue business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash and liquid investments, credit facilities, other debt arrangements and trade payables. Our liquidity could be materially adversely impacted if our vendors reduce payment terms and/or impose tighter credit limits. If our sources of liquidity do not satisfy our requirements, we may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the regulatory environment for banks and other financial institutions, the availability of credit and our credit ratings, and our reputation with potential lenders. These factors could materially adversely affect our costs of borrowing and our ability to pursue growth opportunities, and threaten our ability to meet our obligations as they become due.
Changes in our credit ratings may limit our access to capital and materially increase our borrowing costs.
In fiscal 2015, Moody's Investors Service, Inc. maintained its long-term credit rating at Baa2 and revised its outlook from Negative to Stable. Fitch Ratings Ltd. upgraded its long-term credit rating from BB- to BB, maintaining its outlook as Stable. Standard & Poor's Ratings Services maintained their long-term credit rating at BB with a Stable outlook.
Future downgrades to our credit ratings and outlook could negatively impact our access to capital markets, the borrowing cost for future financings and the perception of our credit risk by lenders and other third parties. Our credit ratings are based upon information furnished by us or obtained by a rating agency from its own sources and are subject to revision, suspension or withdrawal by one or more rating agencies at any time. Rating agencies may change the ratings assigned to us due to developments that are beyond our control, including the introduction of new rating practices and methodologies.
Any downgrade may result in higher interest costs for certain of our credit facilities and could result in higher interest costs on future financings. In addition, downgrades may impact our ability to obtain adequate financing, including via trade payables with our vendors. Customers' inclination to shop with us or purchase gift cards or extended warranties may also be affected by the publicity associated with deterioration of our credit ratings.
Failure to effectively manage strategic ventures or acquisitions could have a negative impact on our business.
From time to time, our strategy has involved, and may in the future involve, entering into new business ventures and strategic alliances, as well as making acquisitions. Assessing a potential opportunity can be based on assumptions that might not ultimately prove to be correct. In addition, the amount of information we can obtain about a potential opportunity may be limited, and we can give no assurance that new business ventures, strategic alliances and acquisitions will positively affect our financial performance or will perform as planned. The success of these opportunities is also largely dependent on the current and future participation, working relationship and strategic vision of the business venture or strategic alliance partners, which can change following a transaction. Integrating new businesses, stores and concepts can be a difficult task. Cultural differences in some markets into which we may expand or into which we may introduce new retail concepts may not be as well received by customers as originally anticipated. These types of transactions may divert our capital and our management's attention from other business issues and opportunities and may also negatively impact our return on invested capital. Further, implementing new partnerships, strategic alliances or business ventures may also impair our relationships with our vendors or other strategic partners. We may not be able to successfully assimilate or integrate companies that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures. We may also encounter challenges in achieving appropriate internal control over financial reporting and deficiencies in information technology systems in connection with the integration of an acquired company. If we fail to assimilate or integrate acquired companies successfully, our business, reputation and operating results could suffer materially. Likewise, our failure to integrate and manage acquired companies successfully may lead to impairment of the associated goodwill and intangible asset balances.
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Failure to protect the integrity, security and confidentiality of our employee and customer data could expose us to litigation costs and materially damage our standing with our customers.
The use and handling of personally identifiable data by our business, our business associates and third parties is regulated at the state, federal and international levels. We are also contractually obligated to comply with certain industry standards regarding payment card information. Increasing costs associated with information security, such as increased investment in technology and qualified staff, the costs of compliance and costs resulting from fraud could cause our business and results of operations to suffer materially. Additionally, the success of our online operations depends upon the secure transmission of customer and other confidential information over public networks, including the use of cashless payments. While we take significant steps to protect this information, lapses in our controls or the intentional or negligent actions of employees, business associates or third parties may undermine our security measures. As a result, unauthorized parties may obtain access to our data systems and misappropriate employee, customer and other confidential data. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and customer personal data. Furthermore, because the methods used to obtain unauthorized access change frequently and may not be immediately detected, we may be unable to anticipate these methods or promptly implement preventative measures. Any such compromise of our security or the security of information residing with our business associates or third parties could have a material adverse effect on our reputation, which may in turn have a negative impact on our sales, and may expose us to material costs, penalties and compensation claims. In addition, any compromise of our data security may materially increase the costs we incur to protect against such breaches and could subject us to additional legal risk.
Our reliance on key vendors and mobile network carriers subjects us to various risks and uncertainties which could affect our operating results.
We source the products we sell from a wide variety of domestic and international vendors. In fiscal 2015, our 20 largest suppliers accounted for approximately 73% of the merchandise we purchased, with 5 suppliers – Apple, Samsung, Hewlett-Packard, Sony and LG Electronics – representing approximately 47% of total merchandise purchased. We generally do not have long-term written contracts with our vendors that would require them to continue supplying us with merchandise. We depend on our vendors for, among other things, appropriate allocation of merchandise, development of compelling assortments of products, operation of vendor-focused shopping experiences within our stores, acceptance of product returns, approval and payment for factory warranty claims and funding for various forms of promotional programs. To varying degrees, our vendors may be able to leverage their financial strength, customer popularity or alternative channels (including, in some instances, our vendors’ own retail locations or websites) to influence these factors and other factors to our commercial disadvantage. Such changes could have a material adverse impact on our revenues and profitability.
We are also dependent on mobile network carriers to allow us to offer mobile devices with carrier connections. The competitive strategies utilized by mobile network carriers can have a material impact on our revenues and margins. For example, if carriers change customer upgrade terms, monthly fee plans, cancellation fees or service levels, the volume of upgrades and new contracts we sign with customers may be reduced, adversely affecting our revenues and profitability. In addition, many of our carriers also serve customers through their own stores, websites, mobile applications and call centers. If customers choose to upgrade or make new connections through carriers directly, rather than through us, our revenues and profitability could be adversely affected. We could also experience declines in revenue and profitability if our carriers decided not to allow us to market their products or services.
We have internal standards that we require all of our vendors to meet. Our ability to find qualified vendors who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S. Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, port delays, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, civil unrest, natural disasters, outbreaks of pandemics and other factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could materially adversely affect our financial results.
Changes in the demand for our service offerings could have a material adverse impact on our operating results.
Our customer promises include provision of a full range of services to complement our product offerings, including extended warranties, delivery, installation, technical support, network set-up and repair services. Many of these service offerings are through our Geek Squad brand, which provides an opportunity to deliver superior customer service and drives incremental revenue and income – often through attachment of these services at the point of sale. As customers increasingly migrate to websites and mobile applications to initiate transactions, there is a risk that we are unsuccessful in effectively promoting the benefits of these complementary service offerings through those channels. If we fail to design and market these services
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effectively to our customers or fail to meet our customers’ expectations in the execution of these services, our revenues and income could be adversely affected.
Natural disasters, changes in climate and geo-political events could adversely affect our operating results.
The threat or occurrence of one or more natural disasters or other extreme weather events, whether as a result of climate change or otherwise, the threat or outbreak of terrorism, civil unrest or other hostilities or conflicts, could materially adversely affect our financial performance. These events may result in damage to or destruction or closure of, our stores, distribution centers and other properties. Such events can also adversely affect our work force and prevent employees and customers from reaching our stores and other properties, can modify consumer purchasing patterns and decrease disposable income, and can disrupt or disable portions of our supply chain and distribution network.
Our exclusive brands products are subject to several additional product, supply chain and legal risks that could affect our operating results.
Sales of our exclusive brands products, which primarily include Insignia, Modal, Dynex, Init, Platinum and Rocketfish branded products, represent an important component of our revenue. Most of these products are manufactured by contracted manufacturers based in southeastern Asia. This arrangement exposes us to the following additional potential risks, which could materially adversely affect our reputation, financial condition and operating results:
• | We have greater exposure and responsibility to consumers for warranty replacements and repairs as a result of exclusive brand product defects, and our recourse to contracted manufacturers for such warranty liabilities may be limited in foreign jurisdictions; |
• | We may be subject to regulatory compliance and/or product liability claims relating to personal injury, death or property damage caused by exclusive brand products, some of which may require us to take significant actions such as product recalls; |
• | We may experience disruptions in manufacturing or logistics due to inconsistent and unanticipated order patterns, our inability to develop long-term relationships with key factories or unforeseen natural disasters; |
• | We may not be able to locate manufacturers that meet our internal standards, whether for new exclusive brand products or for migration of the manufacturing of products from an existing manufacturer; |
• | We are subject to developing and often-changing labor and environmental laws for the manufacture of products in foreign countries, and we may be unable to conform to new rules or interpretations in a timely manner; |
• | We may be subject to claims by technology or other intellectual property owners if we inadvertently infringe upon their patents or other intellectual property rights, or if we fail to pay royalties owed on our exclusive brand products; |
• | We may be unable to obtain or adequately protect patents and other intellectual property rights on our exclusive brand products or manufacturing processes; and |
• | Regulations regarding disclosure of efforts to identify the country of origin of “conflict minerals” in certain portions of our supply chain could increase the cost of doing business and, depending on the findings of our country of origin inquiry, could have an adverse effect on our reputation. |
Maintaining consistent quality, availability and competitive pricing of our exclusive brands products helps us build and maintain customer loyalty, generate sales and achieve acceptable margins. Failure to maintain these factors could have a significant adverse impact on the demand for exclusive brand products and the margins we are able to generate from them.
We are subject to certain statutory, regulatory and legal developments which could have a material adverse impact on our business.
Our statutory, regulatory and legal environments expose us to complex compliance and litigation risks that could materially adversely affect our operations and financial results. The most significant compliance and litigation risks we face are:
• | The difficulty of complying with sometimes conflicting statutes and regulations in local, national or international jurisdictions; |
• | The potential for unexpected costs related to new or compliance with existing environmental legislation or international agreements affecting energy, carbon emissions, electronics recycling and water or product materials; |
• | The impact of new regulations governing data privacy and security, whether imposed as a result of increased cyber-security risks or otherwise; |
• | The impact of other new or changing statutes and regulations including, but not limited to, financial reform, National Labor Relations Board rule changes, health care reform, corporate governance matters and/or other as yet unknown legislation, that could affect how we operate and execute our strategies as well as alter our expense structure; |
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• | The impact of changes in tax laws (or interpretations thereof by courts and taxing authorities) and accounting standards; and |
• | The impact of litigation trends, including class action lawsuits involving consumers and shareholders, and labor and employment matters. |
Regulatory activity focused on the retail industry has grown in recent years, increasing the risk of fines and additional operating costs associated with compliance. Additionally, defending against lawsuits and other proceedings may involve significant expense and divert management's attention and resources from other matters.
Changes to the National Labor Relations Act or other labor-related statutes or regulations could have an adverse impact on our costs and impair the viability of our operating model.
The National Labor Relations Board continually considers changes to labor regulations, many of which could significantly impact the nature of labor relations in the U.S. and how union organizing and union elections are conducted. The U.S. Department of Labor is considering new regulations requiring companies to publicly report the use and associated expense of external resources providing labor relations guidance and advice. As of January 31, 2015, none of our U.S. operations had employees represented by labor unions or working under collective bargaining agreements. Changes in labor-related statutes or regulations could increase the percentage of elections won by unions. If any segment of Best Buy’s operations became unionized, it could increase our costs of doing business and adversely affect our operations.
Economic, regulatory and other developments could adversely affect the profitability of our promotional financing and credit card arrangements and our promotional financing offerings and therefore our operating results.
We offer promotional financing and credit cards issued by a third-party bank that manages and directly extends credit to our customers. The cardholders can receive low- or no-interest promotional financing on qualifying purchases. Total revenues from these programs accounted for approximately 20% of our revenue in fiscal 2015. We view these arrangements as a way to generate incremental sales of products and services from customers who prefer the financing terms to other available forms of payment. In addition, we earn profit-share income from our banking partners based on the performance of the credit card portfolio, and the amount of income we earn in this regard is subject to numerous factors such as the volume of credit card or financing transactions, bad debt rates, interest rates, the regulatory environment and expenses of operating the program. Adverse changes to any of these factors could impair our ability to offer these programs to customers and reduce our ability to earn income from sharing in the profits of the program.
We rely heavily on our information technology systems for our key business processes. Any failure or interruption in these systems could have a material adverse impact on our business.
The effective and efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to manage all key aspects of our business, including demand forecasting, purchasing, supply chain management, point-of-sale processing, staff planning and deployment, website offerings, financial management and forecasting and safeguarding critical and sensitive information. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, could significantly disrupt our business and cause, for example, higher costs and lost revenues and could threaten our ability to remain in operation.
In addition, we utilize complex information technology platforms to operate our websites and mobile applications. Disruptions to these services, such as those caused by unforeseen traffic levels or other technical difficulties, could cause us to forego material revenues and adversely affect our reputation with consumers.
We utilize third-party vendors for certain aspects of our business operations.
We engage key third-party business partners to support various functions of our business, including but not limited to, information technology, human resource operations, customer loyalty programs, promotional financing and customer loyalty credit cards, customer warranty and insurance programs. Any material disruption in our relationship with key third-party business partners or any disruption in the services or systems provided or managed by third parties could impact our revenues and cost structure and hinder our ability to continue operations, particularly if a disruption occurs during peak revenue periods.
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We are highly dependent on the cash flows and net earnings we generate during our fourth fiscal quarter, which includes the majority of the holiday shopping season.
Approximately one-third of our revenue and more than one-half of our net earnings have historically been generated in our fourth fiscal quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. Unexpected events or developments such as natural or man-made disasters, product sourcing issues, failure or interruption of management information systems, disruptions in services or systems provided or managed by third-party vendors or adverse economic conditions in our fourth fiscal quarter could have a material adverse effect on our annual results of operations.
Our revenues and margins are highly sensitive to developments in products and services.
The consumer electronics industry involves constant innovation and evolution of products and services offered to consumers. The following examples demonstrate the impact this can have on our business:
• | Following the introduction of tablets, their sales grew rapidly and changed the market for mobile computing devices; however, the market has declined rapidly in fiscal 2015 as demand levels have fallen due to market saturation and minimal product innovation; |
• | Product convergence has significantly impacted the demand for some products; for example, the growth of increasingly sophisticated smartphones has reduced the demand for separate cameras, gaming systems, music players and GPS devices; |
• | The timing of new product introductions and updates can have a dramatic impact on the timing of revenues; for example, the introduction of new gaming systems can produce high demand levels for hardware and the accompanying software, which may be followed by several years of decline in demand; |
• | Delivery models for some products are affected by technological advances and new product innovations; for example, media such as music, video and gaming is increasingly transferring to digital delivery methods that may reduce the need for physical CD, DVD, Blu-ray and gaming products; and |
• | Disruptions in the availability of content (such as sporting events or other broadcast programming) may influence the demand for hardware that our customers purchase to access such content, as well as the commission we receive from service providers. |
Many of the factors described above are not controllable by us. The factors can have a material adverse impact on our relevance to the consumer and the demand for products and services we have traditionally offered. It is possible that these and similar changes could materially affect our revenues and profitability.
Our international activities are subject to many of the same risks as described above, as well as to risks associated with the legislative, judicial, regulatory, political and economic factors specific to the countries or regions in which we operate.
We operate international retail locations in Canada and Mexico. In addition, we have a presence in various other foreign countries, including Bermuda, China, Germany, Hong Kong, Japan, Luxembourg, the Republic of Mauritius, the Netherlands, Taiwan, Turks and Caicos, and the U.K. During fiscal 2015, our International segment's operations generated 11% of our revenue. Our future operating results in these countries and in other countries or regions throughout the world where we may operate in the future could be materially adversely affected by a variety of factors, many of which are beyond our control, including political conditions, economic conditions, legal and regulatory constraints, foreign trade rules and monetary and fiscal policies (both of the U.S. and of other countries). In addition, foreign currency exchange rates and fluctuations may have an impact on our future revenues, earnings and cash flows from International operations and could materially adversely affect our reported financial performance.
Our International segment's operations face other risks as well, including the costs and difficulties of managing international operations, greater difficulty in enforcing intellectual property rights in countries other than the U.S., and potential adverse tax consequences. The various risks inherent in doing business in the U.S. generally also exist when doing business outside of the U.S. and may be exaggerated by differences in culture, laws and regulations. There is a heightened risk that we misjudge the response of consumers in foreign markets to our product and service assortments, marketing and promotional strategy and store and website designs, among other factors, and this could adversely impact the results of these operations and the viability of these ventures.
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Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.
We may provide public guidance on our expected financial results for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management's expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided. If our financial results for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock may decline.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Properties.
Stores, Distribution Centers and Corporate Facilities
Domestic Segment
The following table summarizes the location of our Domestic segment stores at the end of fiscal 2015:
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | Magnolia Audio Video Stores | |||||||||
Alabama | 15 | 6 | — | — | ||||||||
Alaska | 2 | — | — | — | ||||||||
Arizona | 24 | 2 | — | — | ||||||||
Arkansas | 9 | 5 | — | — | ||||||||
California | 118 | 26 | 29 | 2 | ||||||||
Colorado | 22 | 5 | — | — | ||||||||
Connecticut | 12 | 6 | — | — | ||||||||
Delaware | 4 | 1 | — | — | ||||||||
District of Columbia | 2 | — | — | — | ||||||||
Florida | 65 | 35 | — | — | ||||||||
Georgia | 28 | 10 | — | — | ||||||||
Hawaii | 2 | — | — | — | ||||||||
Idaho | 5 | 2 | — | — | ||||||||
Illinois | 51 | 15 | — | — | ||||||||
Indiana | 23 | 11 | — | — | ||||||||
Iowa | 13 | 1 | — | — | ||||||||
Kansas | 9 | 3 | — | — | ||||||||
Kentucky | 9 | 7 | — | — | ||||||||
Louisiana | 16 | 6 | — | — | ||||||||
Maine | 5 | — | — | — | ||||||||
Maryland | 23 | 13 | — | — | ||||||||
Massachusetts | 26 | 10 | — | — | ||||||||
Michigan | 34 | 11 | — | — | ||||||||
Minnesota | 23 | 11 | — | — | ||||||||
Mississippi | 9 | 2 | — | — | ||||||||
Missouri | 20 | 10 | — | — | ||||||||
Montana | 3 | — | — | — | ||||||||
Nebraska | 5 | 3 | — | — | ||||||||
Nevada | 10 | 4 | — | — | ||||||||
New Hampshire | 6 | 3 | — | — | ||||||||
New Jersey | 27 | 11 | — | — | ||||||||
New Mexico | 5 | 3 | — | — | ||||||||
New York | 54 | 15 | — | — | ||||||||
North Carolina | 32 | 15 | — | — | ||||||||
North Dakota | 4 | 1 | — | — | ||||||||
Ohio | 37 | 12 | — | — | ||||||||
Oklahoma | 13 | 4 | — | — | ||||||||
Oregon | 12 | 3 | — | — | ||||||||
Pennsylvania | 38 | 14 | — | — | ||||||||
Puerto Rico | 3 | — | — | — | ||||||||
Rhode Island | 1 | — | — | — | ||||||||
South Carolina | 15 | 4 | — | — | ||||||||
South Dakota | 2 | 1 | — | — | ||||||||
Tennessee | 16 | 9 | — | — | ||||||||
Texas | 105 | 36 | — | — | ||||||||
Utah | 10 | — | — | — | ||||||||
Vermont | 1 | — | — | — | ||||||||
Virginia | 34 | 10 | — | — | ||||||||
Washington | 19 | 9 | — | — | ||||||||
West Virginia | 5 | — | — | — | ||||||||
Wisconsin | 23 | 11 | — | — | ||||||||
Wyoming | 1 | 1 | — | — | ||||||||
Total | 1,050 | 367 | 29 | 2 | ||||||||
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The following table summarizes the ownership status and total square footage of our Domestic segment store locations at the end of fiscal 2015:
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | Magnolia Audio Video Stores | |||||||||
Owned store locations | 25 | — | — | — | ||||||||
Owned buildings and leased land | 31 | — | — | — | ||||||||
Leased store locations | 994 | 367 | 29 | 2 | ||||||||
Square footage (in thousands) | 40,426 | 503 | 767 | 20 | ||||||||
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers, service centers and corporate offices of our Domestic segment at the end of fiscal 2015:
Square Footage (in thousands) | ||||||||
Location | Leased | Owned | ||||||
Distribution centers | 23 locations in 17 U.S. states | 7,489 | 3,168 | |||||
Geek Squad service center(1) | Louisville, Kentucky | 237 | — | |||||
Principal corporate headquarters(2) | Richfield, Minnesota | — | 1,452 | |||||
Territory field offices | 13 locations throughout the U.S. | 94 | — | |||||
Pacific Sales corporate office space | Torrance, California | 20 | — | |||||
(1) | The leased space utilized by our Geek Squad operations is used primarily to service notebook and desktop computers. |
(2) | Our principal corporate headquarters consists of four interconnected buildings. Certain vendors who provide us with a variety of corporate services occupy a portion of our principal corporate headquarters. We also sublease a portion of our principal corporate headquarters to third parties. |
International Segment
The following table summarizes the location of our International segment continuing operations stores at the end of fiscal 2015:
Canada | Mexico | |||||||||||||
Future Shop Stores | Best Buy Stores | Best Buy Mobile Stand-Alone Stores | Best Buy Stores | Best Buy Express Stores | ||||||||||
Canada | ||||||||||||||
Alberta | 17 | 12 | 9 | — | — | |||||||||
British Columbia | 22 | 9 | 10 | — | — | |||||||||
Manitoba | 4 | 2 | — | — | — | |||||||||
New Brunswick | 3 | — | — | — | — | |||||||||
Newfoundland | 1 | 1 | — | — | — | |||||||||
Nova Scotia | 6 | 2 | 1 | — | — | |||||||||
Ontario | 52 | 33 | 30 | — | — | |||||||||
Prince Edward Island | 1 | — | — | — | — | |||||||||
Quebec | 25 | 10 | 6 | — | — | |||||||||
Saskatchewan | 2 | 2 | — | — | — | |||||||||
Mexico | ||||||||||||||
Coahuila | — | — | — | — | 1 | |||||||||
Estado de Mexico | — | — | — | 3 | 1 | |||||||||
Distrito Federal | — | — | — | 7 | 2 | |||||||||
Jalisco | — | — | — | 4 | — | |||||||||
Michoacan | — | — | — | 1 | — | |||||||||
Nuevo Leon | — | — | — | 2 | 1 | |||||||||
San Luis Potosi | — | — | — | 1 | — | |||||||||
Total | 133 | 71 | 56 | 18 | 5 | |||||||||
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The following table summarizes the ownership status and total square footage of our International segment continuing operations store locations at the end of fiscal 2015:
Canada | Mexico | |||||||||||||
Future Shop Stores | Best Buy Stores | Best Buy Mobile Stand-Alone Stores | Best Buy Stores | Best Buy Express Stores | ||||||||||
Owned store locations | — | 3 | — | — | — | |||||||||
Leased store locations | 133 | 68 | 56 | 18 | 5 | |||||||||
Square footage (in thousands) | 3,493 | 2,257 | 52 | 661 | 7 | |||||||||
The above tables exclude 181 Five Star store locations with a total of 5,928,000 square feet, which were held for sale as of January 31, 2015. The sale of Five Star was completed on February 13, 2015.
In March 2015, we made a decision to consolidate Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in permanently closing 66 Future Shop stores and converting 65 Future Shop stores to the Best Buy brand. We separately closed two Future Shop locations in March 2015 as part of our normal operations.
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers and corporate offices of our International segment continuing operations at the end of fiscal 2015:
Square Footage (in thousands) | Square Footage (in thousands) | ||||||||||||||
Distribution Centers | Leased | Owned | Principal Corporate Offices | Leased | Owned | ||||||||||
Canada | Brampton and Bolton, Ontario | 1,685 | — | Burnaby, British Columbia | 141 | — | |||||||||
Vancouver, British Columbia | 439 | — | |||||||||||||
Mexico | Estado de Mexico, Mexico | 89 | — | Distrito Federal, Mexico | 32 | — | |||||||||
Exclusive Brands
We lease approximately 61,000 square feet of office space in China to support our exclusive brands operations.
Operating Leases
Almost all of our stores and a majority of our distribution facilities are leased. Additional information regarding our operating leases is available in Note 1, Summary of Significant Accounting Policies, and Note 8, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
For a description of our legal proceedings, see Note 12, Contingencies and Commitments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not applicable.
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Executive Officers of the Registrant
(As of March 23, 2015)
Name | Age | Position With the Company | Years With the Company | |||
Hubert Joly | 55 | President and Chief Executive Officer | 2 | |||
Sharon L. McCollam | 52 | Chief Administrative Officer and Chief Financial Officer | 2 | |||
Shari L. Ballard | 48 | President, U.S. Retail and Chief Human Resources Officer | 22 | |||
R. Michael Mohan | 47 | Chief Merchandising Officer | 11 | |||
Keith J. Nelsen | 51 | General Counsel and Secretary | 9 | |||
Hubert Joly was appointed President and Chief Executive Officer and a Director in September 2012. Mr. Joly was previously the president and chief executive officer of Carlson, Inc., a worldwide hospitality and travel company based in Minneapolis, Minnesota, from 2008 until his current appointment. Prior to becoming chief executive officer of Carlson, Mr. Joly was president and chief executive officer of Carlson Wagonlit Travel, a business travel management company, from 2004 until 2008. He held several senior executive positions with Vivendi S.A., a French multinational media and telecommunications company, from 1999 to 2004. Prior to that time, Mr. Joly worked in the technology sector at Electronic Data Systems (now part of Hewlett-Packard Company) from 1996 to 1999, and at McKinsey & Company, Inc. from 1983 to 1996. Mr. Joly is currently a member of the board of directors of Ralph Lauren Corporation, a leader in the design, marketing and retailing of premier lifestyle products. He also serves on the executive committee of the Retail Industry Leaders Association and the executive committee of the Minnesota Business Partnership. Mr. Joly previously served as a director of Carlson, Inc.; chair of the board of directors of the Rezidor Hotel Group; chair of the board of directors of Carlson Wagonlit Travel; chair of the Travel Facilitation Sub-Committee of the U.S. Department of Commerce Travel and Tourism Advisory Board; on the executive committee of the World Travel and Tourism Council, on the board of trustees of the Minneapolis Institute of Arts, and on the board of overseers of the Carlson School of Management.
Sharon L. McCollam was appointed Chief Administrative and Chief Financial Officer in December 2012. In this role, she leads our finance, information technology, supply chain, logistics, real estate, procurement, enterprise customer care, internal audit, Mexico and growth initiative functions. Ms. McCollam was previously executive vice president, chief operating officer and chief financial officer of Williams-Sonoma Inc., a premier specialty retailer of home furnishings, from July 2006 until her retirement in March 2012. At Williams-Sonoma, she was responsible for the long-term strategic planning activities of the company and oversaw multiple key functions, including global finance, treasury, investor relations, information technology, real estate, store development, corporate operations and human resources. Ms. McCollam also held various executive leadership roles, including principal accounting officer, at Williams-Sonoma from March 2000 to July 2006. Prior to her time at Williams-Sonoma, Ms. McCollam served as chief financial officer of Dole Fresh Vegetables Inc. from 1996 to 2000 and in various other finance-related leadership positions at Dole Food Company Inc., a producer and marketer of fresh fruit and vegetables, from 1993 to 1996. Ms. McCollam serves as a member of the board of directors for Sutter Health, a nonprofit network of hospitals and doctors in Northern California; Art.com, an online specialty art retailer; and Privalia Venta Directa, s.a., a European e-commerce apparel retailer. Ms. McCollam previously served as a member of the board of directors of OfficeMax Incorporated, Williams-Sonoma and Del Monte Foods Company.
Shari L. Ballard was named President, U.S. Retail and Chief Human Resources Officer in 2014. She is responsible for the end-to-end operations and execution of all U.S. Best Buy stores and the human resources function. Previously, she served as President, International and Chief Human Resources Officer from 2013 to 2014; Executive Vice President and President, International from 2012 to 2013; Executive Vice President, President - Americas from March 2010 until 2012; Executive Vice President - Retail Channel Management from 2007 to 2010; and Executive Vice President - Human Resources and Legal from 2004 to 2007. Ms. Ballard joined us in 1993 and has served as Senior Vice President, Vice President, and General and Assistant Store Manager. Ms. Ballard serves on the board of directors of the Delhaize Group, a Belgian international food retailer. She is also a member of the Minneapolis Institute of Arts board of trustees and the University of Minnesota Foundation board of trustees. She also serves on the board of directors of the Delhaize Group, a Belgian international food retailer.
R. Michael “Mike” Mohan was appointed our Chief Merchandising Officer in January 2014. In this role, he manages the category management and merchandising functions for our U.S. business, including our category growth strategies, vendor relationships, private label business and assortment. Previously, Mr. Mohan served as President, Home since June 2013 until his current appointment; Senior Vice President, General Manager - Home Business Group from 2011 to June 2013; Senior Vice President, Home Theater from 2008 to 2011; and Vice President, Home Entertainment from 2006 to 2008. Prior to joining Best
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Buy in 2004 as Vice President, Digital Imaging, Mr. Mohan was vice president and general merchandising manager for Good Guys, an audio/video specialty retailer in the western United States. Mr. Mohan also previously worked at Future Shop in Canada from 1988 to 1997, prior to our acquisition of the company, where he served in various merchandising roles. Mr. Mohan serves as a member of the board of directors for Consumer Electronics Association Board of Industry Leaders and was appointed as a trustee to Boys & Girls Club of America in March 2014.
Keith J. Nelsen has served as our General Counsel and Secretary since 2011. In this role, he manages our enterprise legal and risk management functions, as well as acts as Secretary to our Board of Directors. Previously, in addition to his current role, he also served as Chief Risk Officer from 2012 to 2013. He was appointed Executive Vice President, General Counsel in May 2011 and Secretary of the Company in June 2011 and served as Senior Vice President, Commercial and International General Counsel from 2008 until his current appointment. Mr. Nelsen joined Best Buy in 2006 as Vice President, Operations and International General Counsel. Prior to joining us, he worked at Danka Business Systems PLC, an office products supplier, from 1997 to 2006 and served in various roles, including chief administration officer and general counsel. Prior to his time at Danka, Mr. Nelsen held the role of vice president, legal from 1995 to 1997 at NordicTrack, Inc., a provider of leisure equipment products. Mr. Nelsen began his career in 1989 as a practicing attorney with Best and Flanagan, LLP, a law firm located in Minneapolis, Minnesota. Mr. Nelsen is a member of the board of directors of NuShoe, Inc., a privately held shoe repair facility in San Diego, California.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Dividends
Our common stock is traded on the New York Stock Exchange under the ticker symbol BBY. In fiscal 2004, our Board initiated the payment of a regular quarterly cash dividend with respect to shares of our common stock. A quarterly cash dividend has been paid in each subsequent quarter. Future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board. The table below sets forth the high and low sales prices of our common stock as reported on the New York Stock Exchange – Composite Index and the dividends declared and paid during the periods indicated.
Sales Price | Dividends Declared and Paid | ||||||||||||||||||||||
Fiscal 2015 | Fiscal 2014 | Fiscal Year | |||||||||||||||||||||
High | Low | High | Low | 2015 | 2014 | ||||||||||||||||||
First Quarter | $ | 28.20 | $ | 22.30 | $ | 26.92 | $ | 13.83 | $ | 0.17 | $ | 0.17 | |||||||||||
Second Quarter | 32.24 | 24.57 | 31.33 | 24.98 | 0.17 | 0.17 | |||||||||||||||||
Third Quarter | 35.53 | 28.80 | 43.85 | 30.16 | 0.19 | 0.17 | |||||||||||||||||
Fourth Quarter | 40.03 | 33.17 | 44.66 | 22.15 | 0.19 | 0.17 | |||||||||||||||||
Holders
As of March 23, 2015, there were 2,933 holders of record of our common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In June 2011, our Board authorized up to $5.0 billion of share repurchases, which became effective on June 21, 2011. There is no expiration date governing the period over which we can repurchase shares under the June 2011 program. We did not repurchase any shares during fiscal 2015. At the end of fiscal 2015, $4.0 billion of the $5.0 billion of share repurchases authorized by our Board in June 2011 was available for future share repurchases.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about our common stock that may be issued under our equity compensation plans as of January 31, 2015.
Plan Category | Securities to Be Issued Upon Exercise of Outstanding Options and Rights (a) | Weighted Average Exercise Price per Share of Outstanding Options and Rights(1) (b) | Securities Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(2) (c) | |||||||
Equity compensation plans approved by security holders | 19,046,251 | (3) | $ | 36.81 | 27,290,742 | |||||
(1) | Includes weighted-average exercise price of outstanding stock options only. |
(2) | Includes 4,546,228 shares of our common stock which have been reserved for issuance under our 2008 and 2003 Employee Stock Purchase Plans. |
(3) | Includes grants of stock options and market-based restricted stock under our 2004 Omnibus Stock and Incentive Plan, as amended, and our 2014 Omnibus Incentive Plan. |
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Best Buy Stock Comparative Performance Graph
The information contained in this Best Buy Stock Comparative Performance Graph section shall not be deemed to be "soliciting material" or "filed" or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total shareholder return on our common stock for the last five fiscal years with the cumulative total return on the Standard & Poor's 500 Index ("S&P 500"), of which we are a component, and the Standard & Poor's Retailing Group Industry Index ("S&P Retailing Group"), of which we are also a component. The S&P Retailing Group is a capitalization-weighted index of domestic equities traded on the NYSE and NASDAQ and includes high-capitalization stocks representing the retail sector of the S&P 500.
The graph assumes an investment of $100 at the close of trading on February 26, 2010, the last trading day of fiscal 2010, in our common stock, the S&P 500 and the S&P Retailing Group.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Best Buy Co., Inc., the S&P 500 and the S&P Retailing Group
FY10 | FY11 | FY12 | FY13 | FY14 | FY15 | ||||||||||||||||||
Best Buy Co., Inc. | $ | 100.00 | $ | 90.05 | $ | 69.23 | $ | 47.68 | $ | 71.26 | $ | 109.09 | |||||||||||
S&P 500 | 100.00 | 122.57 | 128.86 | 144.24 | 175.27 | 200.21 | |||||||||||||||||
S&P Retailing Group | 100.00 | 126.53 | 149.66 | 185.33 | 233.92 | 280.10 | |||||||||||||||||
* | Cumulative total return assumes dividend reinvestment. |
Source: Research Data Group, Inc.
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Item 6. Selected Financial Data.
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Five-Year Financial Highlights
$ in millions, except per share amounts
12-Month | 11-Month | 12-Month | ||||||||||||||||||
Fiscal Year | 2015(1) | 2014(2) | 2013(3)(4) | 2012(3)(5) | 2011(6) | |||||||||||||||
Consolidated Statements of Earnings Data | ||||||||||||||||||||
Revenue | $ | 40,339 | $ | 40,611 | $ | 38,252 | $ | 43,426 | $ | 42,683 | ||||||||||
Operating income | 1,450 | 1,144 | 90 | 2,126 | 2,216 | |||||||||||||||
Net earnings (loss) from continuing operations | 1,246 | 695 | (259 | ) | 1,368 | 1,410 | ||||||||||||||
Gain (loss) from discontinued operations | (11 | ) | (172 | ) | (161 | ) | (1,346 | ) | (44 | ) | ||||||||||
Net earnings (loss) including noncontrolling interests | 1,235 | 523 | (420 | ) | 22 | 1,366 | ||||||||||||||
Net earnings (loss) attributable to Best Buy Co., Inc. shareholders | 1,233 | 532 | (441 | ) | (1,231 | ) | 1,277 | |||||||||||||
Per Share Data | ||||||||||||||||||||
Net earnings (loss) from continuing operations | $ | 3.53 | $ | 2.00 | $ | (0.76 | ) | $ | 3.67 | $ | 3.39 | |||||||||
Net gain (loss) from discontinued operations | (0.04 | ) | (0.47 | ) | (0.54 | ) | (6.94 | ) | (0.31 | ) | ||||||||||
Net earnings (loss) | 3.49 | 1.53 | (1.30 | ) | (3.27 | ) | 3.08 | |||||||||||||
Cash dividends declared and paid | 0.72 | 0.68 | 0.66 | 0.62 | 0.58 | |||||||||||||||
Common stock price: | ||||||||||||||||||||
High | 40.03 | 44.66 | 27.95 | 33.22 | 48.83 | |||||||||||||||
Low | 22.30 | 13.83 | 11.20 | 21.79 | 30.90 | |||||||||||||||
Operating Statistics | ||||||||||||||||||||
Comparable sales gain (decline)(7) | 0.5 | % | (1.0 | )% | (2.7 | )% | (2.2 | )% | (1.8 | )% | ||||||||||
Gross profit rate | 22.4 | % | 23.1 | % | 23.6 | % | 24.5 | % | 25.0 | % | ||||||||||
Selling, general and administrative expenses rate | 18.8 | % | 20.0 | % | 20.7 | % | 19.5 | % | 19.5 | % | ||||||||||
Operating income rate | 3.6 | % | 2.8 | % | 0.2 | % | 4.9 | % | 5.2 | % | ||||||||||
Year-End Data | ||||||||||||||||||||
Current ratio(8) | 1.5 | 1.4 | 1.1 | 1.2 | 1.2 | |||||||||||||||
Total assets | $ | 15,256 | $ | 14,013 | $ | 16,787 | $ | 16,005 | $ | 17,849 | ||||||||||
Debt, including current portion | 1,621 | 1,657 | 2,296 | 2,208 | 1,709 | |||||||||||||||
Total equity | 5,000 | 3,989 | 3,715 | 4,366 | 7,292 | |||||||||||||||
Number of stores | ||||||||||||||||||||
Domestic | 1,448 | 1,495 | 1,503 | 1,447 | 1,317 | |||||||||||||||
International | 283 | 284 | 276 | 264 | 233 | |||||||||||||||
Total | 1,731 | 1,779 | 1,779 | 1,711 | 1,550 | |||||||||||||||
Retail square footage (000s) | ||||||||||||||||||||
Domestic | 41,716 | 42,051 | 42,232 | 43,785 | 43,660 | |||||||||||||||
International | 6,470 | 6,636 | 6,613 | 6,814 | 6,454 | |||||||||||||||
Total | 48,186 | 48,687 | 48,845 | 50,599 | 50,114 | |||||||||||||||
(1) | Included within operating income and net earnings (loss) from continuing operations for fiscal 2015 is $5 million ($4 million net of taxes) of restructuring charges from continuing operations. In addition, net earnings (loss) from continuing operations and net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2015 includes $353 million due to a $353 million discrete benefit related to reorganizing certain European legal entities. |
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(2) | Included within operating income and net earnings (loss) from continuing operations for fiscal 2014 is $149 million ($95 million net of taxes) of restructuring charges from continuing operations recorded in fiscal 2014 related to measures we took to restructure our business. Net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2014 includes restructuring charges (net of tax and noncontrolling interest) from continuing operations. |
(3) | Fiscal 2013 (11-month) included 48 weeks and fiscal 2012 included 53 weeks. All other periods presented included 52 weeks. |
(4) | Included within our operating income and net earnings (loss) from continuing operations for fiscal 2013 (11-month) is $415 million ($268 million net of taxes) of restructuring charges from continuing operations recorded in fiscal 2013 (11-month) related to measures we took to restructure our business. Also included in net earnings (loss) from continuing operations for fiscal 2013 (11-month) is $614 million (net of taxes) of goodwill impairment charges primarily related to Best Buy Canada. Included in gain (loss) from discontinued operations is $23 million (net of taxes) of restructuring charges primarily related to Best Buy Europe and $207 million (net of taxes) of goodwill impairment charges related to Five Star. Net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2013 (11-month) includes restructuring charges (net of tax and noncontrolling interest) from continuing operations and the net of tax goodwill impairment. |
(5) | Included within our operating income and net earnings (loss) from continuing operations for fiscal 2012 is $48 million ($30 million net of taxes) of restructuring charges from continuing operations recorded in fiscal 2012 related to measures we took to restructure our business. Included in gain (loss) from discontinued operations is $194 million (net of taxes) of restructuring charges recorded in fiscal 2012 related to measures we took to restructure our business. Also included in gain (loss) from discontinued operations for fiscal 2012 is $1.2 billion (net of taxes) of goodwill impairment charges related to Best Buy Europe. Net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2012 includes restructuring charges (net of tax and noncontrolling interest) from both continuing and discontinued operations and the net of tax goodwill impairment, and excludes $1.3 billion in noncontrolling interest related to the agreement to buy out Carphone Warehouse Group plc's interest in the profit share-based management fee paid to Best Buy Europe pursuant to the 2007 Best Buy Mobile agreement (which represents earnings attributable to the noncontrolling interest). |
(6) | Included within our operating income and net earnings (loss) from continuing operations for fiscal 2011 is $147 million ($93 million net of taxes) of restructuring charges recorded in the fiscal fourth quarter related to measures we took to restructure our businesses. These charges resulted in a decrease in our operating income rate of 0.3% of revenue for the fiscal year. Included in gain (loss) from discontinued operations is $54 million (net of taxes) of restructuring charges recorded in the fiscal fourth quarter related to measures we took to restructure our business. Net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2011 includes the net of tax impact of restructuring charges from both continuing and discontinued operations. |
(7) | Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded, and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The portion of the calculation of comparable sales attributable to our International segment excludes the effect of fluctuations in foreign currency exchange rates. The calculation of comparable store sales excludes the impact of the extra week of revenue in the fourth quarter of fiscal 2012, as well as revenue from discontinued operations. Comparable online sales are included in our comparable sales calculation. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods. |
(8) | The current ratio is calculated by dividing total current assets by total current liabilities. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in seven sections:
• | Overview |
• | Business Strategy |
• | Results of Operations |
• | Liquidity and Capital Resources |
• | Off-Balance-Sheet Arrangements and Contractual Obligations |
• | Critical Accounting Estimates |
• | New Accounting Pronouncements |
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Overview
We are a leading provider of technology products, services and solutions. We offer expert service at unbeatable price more than 1.5 billion times a year to the consumers, small business owners and educators who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have retail and online operations in the U.S., Canada and Mexico. We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all operations within the U.S. and its territories. The International segment is comprised of all operations outside the U.S. and its territories.
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Our business, like that of many retailers, is seasonal. Historically, we have realized more of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. While consumers view some of the products and services we offer as essential, others are viewed as discretionary purchases. Consequently, our financial results are susceptible to changes in consumer confidence and other macroeconomic factors, including unemployment, consumer credit availability and the condition of the housing market. Additionally, there are other factors that directly impact our performance, such as product life-cycles (including the introduction and pace of adoption of new technology) and the competitive retail environment. As a result of these factors, predicting our future revenue and net earnings is difficult.
Throughout this MD&A, we refer to comparable sales. Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The portion of the calculation of comparable sales attributable to our International segment excludes the effect of fluctuations in foreign currency exchange rates. The calculation of comparable sales excludes the impact of revenue from discontinued operations. Comparable online sales are included in our comparable sales calculation. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods.
In our discussions of the operating results of our consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. The impact of foreign currency exchange rate fluctuations is typically calculated as the difference between current period activity translated using the current period’s currency exchange rates and the comparable prior-year period’s currency exchange rates. We use this method to calculate the impact of changes in foreign currency exchange rates for all countries where the functional currency is not the U.S. dollar.
In our discussions of the operating results below, we sometimes refer to the impact of net new stores on our results of operations. The key factors that dictate the impact that the net new stores have on our operating results include: (i) store opening and closing decisions; (ii) the size and format of new stores, as we operate stores ranging from approximately 1,000 square feet to approximately 50,000 square feet; (iii) the length of time the stores were open during the period; and (iv) the overall success of new store launches.
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as non-GAAP operating income, non-GAAP net earnings from continuing operations, non-GAAP diluted earnings per share from continuing operations and adjusted debt to earnings before goodwill impairment, interest, income taxes, depreciation, amortization and rent ("EBITDAR") ratio. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.
We believe that the non-GAAP measures described above provide meaningful supplemental information to assist shareholders in understanding our financial results and assessing our prospects for future performance. Management believes adjusted operating income, adjusted net earnings from continuing operations and adjusted diluted earnings per share from continuing operations are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management makes standard adjustments for items such as restructuring charges, goodwill impairments, non-restructuring asset impairments and gains or losses on investments, as well as adjustments for other items that may arise during the period and have a meaningful impact on comparability. To measure adjusted operating income, we removed the impact of the second quarter of fiscal 2014 LCD-related legal settlements, non-restructuring asset impairments, restructuring charges and goodwill impairments from our calculation of operating income. Adjusted net earnings from continuing operations was calculated by removing the after-tax impact of operating income adjustments and the gains on investments, as well as the income tax impacts of reorganizing certain European legal entities and the Best Buy Europe sale from our calculation of net earnings from continuing operations. To measure adjusted diluted earnings per share from continuing operations, we excluded the per share impact of net earnings adjustments from our calculation of diluted earnings per share. Management believes our adjusted debt to EBITDAR ratio is an important indicator of our creditworthiness. Because non-GAAP financial measures are not standardized, it may not be possible
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to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures within our discussion of consolidated performance below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
Business Strategy
In the fall of 2012, we laid out for investors the state of our business and summarized the challenges we faced by articulating two fundamental problems: (1) declining comparable sales and (2) declining margins. To address these problems and achieve our goal of becoming the leading authority and destination for technology products and services, we unveiled our Renew Blue transformation effort, incorporating the following five pillars:
• | Reinvigorate and rejuvenate the customer experience |
• | Attract and inspire leaders and employees |
• | Work with vendor partners to innovate and drive value |
• | Increase our return on invested capital |
• | Continue our leadership role in positively impacting our world |
Fiscal 2015 was the second full fiscal year in our Renew Blue transformation, and we continued to make progress against the two main problems we had to solve that we outlined in November of 2012 – declining comparable sales and declining operating margins. In fiscal 2015, we stabilized comparable sales on a full year basis and delivered incremental non-GAAP SG&A reductions of approximately $420 million, resulting in non-GAAP operating income rate expansion of 0.8% of revenue and a 26% increase in non-GAAP diluted earnings per share to $2.60. We also ended the year with $3.9 billion in cash, cash equivalents and short-term investments versus $2.6 billion last year.
These results reflect the cumulative progress since 2012 that we have made against our Renew Blue transformation initiatives. To date, we have: (1) improved our Net Promoter Score (NPS) by 450 basis points; (2) rolled out 71 Pacific Kitchen and Home and 34 Magnolia Design Center stores-within-a-store in addition to our enhanced vendor experiences; (3) implemented ship-from-store across the whole chain, driving significant growth for our business; (4) increased our Domestic online penetration from 7.0% to 9.8%; (5) gained share across multiple categories; (6) delivered $1.02 billion in cost reductions, exceeding our $1 billion target; (7) divested our under-performing European and Chinese businesses; and (8) intensively managed our capital resources and significantly strengthened our balance sheet.
In light of this progress, we announced a plan on March 2, 2015, to return excess capital to shareholders. This plan allows us to continue to invest in the growth of our business and preserve a strong balance sheet and includes: (1) a special, one-time dividend of $0.51 per share, or approximately $180 million, related to the net, after-tax proceeds from LCD-related legal settlements received in the last three fiscal years; (2) a 21% increase in our regular quarterly dividend to $0.23 per share; and (3) the resumption of share repurchases, with the intent to repurchase $1 billion worth of shares over the next three years.
As we look forward to fiscal 2016 and beyond, it is imperative that we continue to focus on driving comparable sales and improving operating margins, while funding investments in our future. We are pursuing a strategy that is focused on delivering Advice, Service and Convenience at competitive prices to our customers. Within this strategy, we are focused on driving a number of growth initiatives around key product categories, life events and services. To drive these initiatives, we are pursuing and investing in the transformation of our key functions and processes. The initiatives we intend to pursue in fiscal 2016 reflect our continued execution against the 24-month road map that we outlined a year ago.
The first initiative is Merchandising. Our goal is to create a compelling assortment online and in the stores with a superior end-to-end customer experience that yields enhanced financial returns. In pursuit of that goal, we plan to: (1) capitalize on the ultra -high definition television cycle through best-in-class merchandising, assortment and customer experience, including opening approximately 20 additional Magnolia Design Center stores-within-a-store to end fiscal 2016 with 78; (2) accelerate our expansion in growing categories with structural barriers to entry – like large appliances and mobile – including opening approximately 60 additional Pacific Kitchen & Home stores-within-a-store to end fiscal 2016 with 177 and extending our installment billing selling capability to online; (3) grow our Connected Home and health and wearables businesses through an optimized assortment and an improved multi-channel customer experience; (4) increase our exclusive brand and private label assortments; (5) expand our secondary market growth strategy to offer consumers better access to these types of products and improve our margin recovery on returned, replaced and damaged products; and (6) apply more science behind our promotional and pricing strategies.
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We will also expand our programs to capture customers at the time of key life events and build long-term relationships with them, including our new mover program and our wedding gift registry, which we launched in February 2015.
The second initiative is Marketing, which provides crucial support for our merchandising growth opportunities. In marketing, we will (1) accelerate our targeted marketing programs by leveraging our customer database to expand personalization beyond email campaigns; (2) extend the personalization of our targeted email campaigns by dynamically serving relevant landing pages when customers click through to our website; (3) continue the evolution of our marketing spend from analog and mass to digital and personalized mediums such as search, mobile devices and re-targeting; and (4) continue to increase the number of addressable emails in our customer database.
The next initiative on our road map is Online. Our goal is to serve our customers based on how, when, and where they want to be served and capture online share. In pursuit of that goal, we will continue to develop true omni-channel experiences, including improving the online visibility of returned, opened box inventory; (2) extending our installment billing selling capability online; (3) enhancing the online experience for appliance purchases; (4) expanding capabilities for life events like the wedding registry and wish list; and (5) providing an integrated Geek Squad customer experience across channels and devices and driving increased attach rates. We will also be continuing the transformation of our e-commerce technology platform and accelerating the transformation of our mobile customer experience which we will support through our new technology development center in Seattle. Similar to general industry trends, our traffic from mobile phones is growing much faster than traditional desktop traffic and we are increasing our mobile investment accordingly. We believe it is imperative that we engage mobile customers with improved and streamlined access to essential, rich product information during the discovery, research and checkout processes.
The next initiative is Retail Stores. In our retail stores we are building on the momentum from our success in fiscal 2015 and will be driving increased sales effectiveness and payroll leverage through focus on the individual sales productivity of our associates, enhancing our in-store customer experience from both an expert service and physical environment perspective, including expanding product training for associates and driving growth by implementing market plans that are tailored to specific geographies.
Services is the next initiative on our road map. In fiscal 2015, we significantly reduced our legacy cost structure and improved our services-related NPS. We also launched a loss and theft mobile phone insurance program and more complete technology support bundles. Despite these accomplishments; however, revenue has been declining largely due to lower attach rates of traditional extended warranties and lower mobile revenue due to our success in decreasing claim severity and frequency, which is an operational positive. In fiscal 2016, we will be focused on (1) continuing to transform our traditional service offerings to better address customer needs; (2) continuing to improve our delivery and installation experience; (3) increasing the investment in marketing and selling our services offerings; and (4) integrating the Geek Squad experience into bestbuy.com to provide an enhanced service experience to our customers and to increase online attach rates.
The next initiative on our road map is Supply Chain. Our goal is to leverage our network and improve our customer experience with increased inventory availability, improved speed to customer, and improved home delivery and installation capabilities for our large cube assortments. In pursuit of these goals, over the next 12 months we will unlock additional inventory for ship-from-store, continue to pursue cost efficiencies through technology enhancements (including replacement of our warehouse technology systems), drive growth in large appliances and large televisions by leveraging new regional inventory capabilities and invest in improving our home delivery and installation services NPS.
The last initiative on our road map is our Cost Structure. Through the fourth quarter of fiscal 2015, we eliminated a total of $1.02 billion in annualized costs, which exceeded our target of $1 billion. In fiscal 2016, we are launching phase two of our cost reduction and gross profit optimization program with a target of approximately $400 million in annualized savings over three years, including the remaining benefit of approximately $250 million from our previously discussed returns, replacements and damages opportunity. These savings, because they are structural in nature, are not expected to begin until the second half of fiscal 2016 and will be driven by streamlined processes and operational efficiencies that will be primarily enabled through investments in systems.
We expect, however, that these incremental savings will be significantly offset by the investments we need to make to fund our growth initiatives. In fiscal 2016, we expect these incremental investments to total approximately $100 million to $120 million, or $0.17 to $0.21 in diluted EPS and fall into three main buckets: (1) the customer experience online and in our retail stores; (2) information technology; and (3) marketing. We also expect to increase our fiscal 2016 capital expenditures to approximately $650 to $700 million, from $550 million in fiscal 2015.
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Fiscal 2016 Trends
The strategy outlined above is the foundation of our fiscal 2016 operating plan, and we are confident in our ability to execute against it as we have demonstrated this past year. However, we will also be facing industry and economic pressures, which we expect to impact our business, including (1) more rapidly declining average selling prices in key product categories; (2) weak industry demand in certain product categories; (3) declining demand and increasing pricing pressures for our extended warranties; and (4) increasingly competitive and costly customer service expectations like free and faster shipping.
To win against this backdrop, investing now is imperative. While these investments will put pressure on our fiscal 2016 operating income rate, we believe they leverage our executional momentum and will allow us to build a differentiated customer experience and a foundation for long-term success. In fiscal 2016, we expect the financial impact of the aforementioned investments and economic pressures in the first quarter and continue throughout the year.
From a revenue perspective, fiscal 2016 first and second quarter Enterprise revenue and comparable sales growth, excluding the estimated impact of installment billing, is expected to be in the range of flat to negative low-single digits. This change in trend versus the fourth quarter of fiscal 2015 is primarily driven by ongoing material declines in the tablet category, in addition to typical holiday momentum around high-profile, giftable products not continuing post-holiday. We will also be anniversarying approximately 80 basis points of Enterprise growth in the first half of fiscal 2015 driven by the chain-wide rollout of ship-from-store.
From a non-GAAP operating income rate perspective, we expect fiscal 2016 first and second quarter to be down approximately 0.3% of revenue to 0.5% of revenue, including lapping fiscal 2015 first quarter 15-basis point benefit associated with our credit card agreement. This decline reflects the economic and growth pressures outlined above, the investments we are making to drive our fiscal 2016 growth initiatives and our anticipated SG&A inflation. Additionally, we expect the fiscal 2016 first and second quarter non-GAAP continuing operations effective income tax rate to be in the range of 39% to 40%.
Canada
In March 2015, we made a decision to consolidate Future Shop and Best Buy stores and websites in Canada under the Best Buy brand in order to strengthen our position as Canada’s leading provider of consumer electronics products, services and solutions. As a result of this decision, we also reviewed our real estate footprint in Canada to address the fact that a significant number of Future Shop and Best Buy stores are located in close proximity to each other. The result of this review is the permanent closure of 66 Future Shop locations and the conversion of 65 Future Shop stores to the Best Buy brand. Following this consolidation, we will continue to have a strong store presence in all major markets in Canada.
Looking ahead, investments up to $160 million will be made in Best Buy stores and bestbuy.ca to build a leading multi-channel customer experience. This multi-faceted strategy will include: (1) launching major home appliances in all stores; (2) working with our vendor partners to bring their products to life in a more compelling way; (3) increasing our staffing levels to better serve our customers; (4) investing in the online shopping experience, for example by expanding in-store pick-up areas for online customers and launching a ship-from-store program, making in-store inventory available to online customers across the country.
As a result of these changes, we expect to increase our capital spending by up to $160 million over the next 12 to 24 months. In addition, we expect to record restructuring charges and non-restructuring impairments in the range of $200 million to $280 million, or a GAAP diluted earnings per share impact of $0.41 to $0.58. We expect that the majority of these charges will be recorded in the first quarter of fiscal 2016. The total charges includes approximately $140 million to $180 million of cash charges – primarily related to future rent obligations and severance – that will be paid over the next 5 years.
We also expect our fiscal 2016 GAAP and non-GAAP diluted earnings per share to be negatively impacted in the range of $0.10 to $0.20 due primarily to a temporary increase in operational expenses associated with consolidation activities and store disruptions resulting from our investments to support the Best Buy multi-channel customer experience. Due to the transitional nature of the majority of these costs, we do not expect this negative earnings per share impact to continue into future years.
See Note 13, Subsequent Events, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about the restructuring charges related to this action.
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Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements in certain foreign jurisdictions, we consolidate the financial results of our Mexico operations, as well as our discontinued China and Europe operations, on a lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a lag. Our policy is to accelerate the recording of events occurring in the lag period that significantly affect our consolidated financial statements. There were no significant intervening events which would have materially affected our financial condition, results of operations, liquidity or other factors had they been recorded during fiscal 2015.
On November 2, 2011, our Board approved a change in our fiscal year-end from the Saturday nearest the end of February to the Saturday nearest the end of January, effective beginning with our fiscal year 2013. As a result of this change, our fiscal year 2013 transition period was 11 months and ended on February 2, 2013. Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information.
In this MD&A, when financial results for fiscal 2014 are compared to financial results for fiscal 2013, the results for the 12-month fiscal 2014 are compared to the results for the 11-month transition period from fiscal 2013. Fiscal 2014 (12-month) included 52 weeks and fiscal 2013 (11-month) included 48 weeks. The following tables show the fiscal months included within the various comparison periods in our MD&A:
Fiscal 2015 (12-month) Results Compared With Fiscal 2014 (12-month)(1) | ||
2015 (12-month) | 2014 (12-month) | |
February 2014 - January 2015 | February 2013 - January 2014 | |
(1) | For entities reported on a lag, the fiscal months included in fiscal 2015 (12 month) and fiscal 2014 (12-month) were January through December. |
Fiscal 2014 (12-month) Results Compared With Fiscal 2013 (11-month)(1) | ||
2014 (12-month) | 2013 (11-month) | |
February 2013 - January 2014 | March 2012 - January 2013 | |
(1) | For entities reported on a lag, the fiscal months included in fiscal 2014 (12-month) were January through December and for fiscal 2013 (11-month) were February through December. |
Discontinued Operations Presentation
The results of mindSHIFT in our Domestic segment and Best Buy Europe and Five Star in our International segment are presented as discontinued operations in our Consolidated Statements of Earnings. Unless otherwise stated, financial results discussed herein refer to continuing operations.
Domestic Segment Installment Billing Plans
In April 2014, we began to sell installment billing plans offered by mobile carriers to our customers to complement the more traditional two-year plans. While the two types of contracts have broadly similar overall economics, installment billing plans typically generate higher revenues due to higher proceeds for devices and higher cost of sales due to lower device subsidies. As we increase our mix of installment billing plans, there is an associated increase in revenue and cost of goods sold and a decrease in gross profit rate, with gross profit dollars relatively unaffected. We estimate that our fiscal 2015 Enterprise and Domestic comparable sales of 0.5% and 1.0%, respectively, both include a 0.5% of revenue impact from this classification difference. The impact on our consolidated gross profit rate was immaterial.
Consolidated Results
Fiscal 2015 Summary
• | Fiscal 2015 included net earnings from continuing operations of $1.2 billion, compared to $695 million in fiscal 2014. Net earnings in fiscal 2015 included a $353 million discrete tax benefit related to reorganizing certain European legal entities, while fiscal 2014 included $149 million of restructuring charges. Earnings per diluted share from continuing operations was $3.53 in fiscal 2015, compared to $2.00 in fiscal 2014. |
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• | Revenue was $40.3 billion in fiscal 2015. The slight decrease from fiscal 2014 was primarily driven by the negative impact of foreign currency exchange fluctuations, partially offset by a comparable sales gain of 0.5%. Excluding the 0.5% of revenue estimated benefit associated with the classification of the new mobile carrier installment billing plans, comparable sales were flat. |
• | Our gross profit rate decreased by 0.7% of revenue to 22.4% of revenue in fiscal 2015. The decrease was primarily due to LCD-related legal settlements received in fiscal 2014. |
• | We generated $1.9 billion in operating cash flow in fiscal 2015, compared to $1.1 billion in fiscal 2014, and we ended fiscal 2015 with $3.9 billion of cash, cash equivalents and short-term investments, compared to $2.9 billion at the end of fiscal 2014. Capital expenditures remained relatively consistent with the prior year, as we continued to follow a more disciplined capital allocation process. |
• | During fiscal 2015, we made four dividend payments totaling $0.72 per share, or $251 million in the aggregate. |
The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):
12-Month | 12-Month | 11-Month | ||||||||||
Consolidated Performance Summary | 2015 | 2014 | 2013 | |||||||||
Revenue | $ | 40,339 | $ | 40,611 | $ | 38,252 | ||||||
Revenue % gain (decline)(1) | (0.7 | )% | 6.2 | % | (11.9 | )% | ||||||
Comparable sales % gain (decline) | 0.5 | % | (1.0 | )% | (2.7 | )% | ||||||
Gross profit | $ | 9,047 | $ | 9,399 | $ | 9,023 | ||||||
Gross profit as a % of revenue(2) | 22.4 | % | 23.1 | % | 23.6 | % | ||||||
SG&A | $ | 7,592 | $ | 8,106 | $ | 7,905 | ||||||
SG&A as a % of revenue(3) | 18.8 | % | 20.0 | % | 20.7 | % | ||||||
Restructuring charges | $ | 5 | $ | 149 | $ | 414 | ||||||
Goodwill impairments | $ | — | $ | — | $ | 614 | ||||||
Operating income | $ | 1,450 | $ | 1,144 | $ | 90 | ||||||
Operating income as a % of revenue | 3.6 | % | 2.8 | % | 0.2 | % | ||||||
Net earnings (loss) from continuing operations | $ | 1,246 | $ | 695 | $ | (259 | ) | |||||
Loss from discontinued operations(2) | $ | (13 | ) | $ | (163 | ) | $ | (182 | ) | |||
Net earnings (loss) attributable to Best Buy Co., Inc. shareholders | $ | 1,233 | $ | 532 | $ | (441 | ) | |||||
Diluted earnings (loss) per share from continuing operations | $ | 3.53 | $ | 2.00 | $ | (0.76 | ) | |||||
Diluted earnings (loss) per share | $ | 3.49 | $ | 1.53 | $ | (1.30 | ) | |||||
(1) | The revenue % decline for fiscal 2013 (11-month) is compared to the 12-month fiscal year 2012 |
(2) | Because retailers vary in how they record costs of operating their supply chain between cost of goods sold and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers' corresponding rates. For additional information regarding costs classified in cost of goods sold and SG&A, refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
(3) | Includes both gain (loss) from discontinued operations and net (earnings) loss from discontinued operations attributable to noncontrolling interests. |
Fiscal 2015 Results Compared With Fiscal 2014
The components of the 0.7% revenue decrease in fiscal 2015 were as follows:
Impact of foreign currency exchange rate fluctuations | (0.7 | )% |
Net store changes | (0.2 | )% |
Non-comparable sales(1) | (0.2 | )% |
Comparable sales impact | 0.4 | % |
Total revenue decrease | (0.7 | )% |
(1) | Non-comparable sales reflects the impact of revenue streams not included within our comparable sales calculation, such as certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable. |
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Our gross profit rate decreased 0.7% of revenue in fiscal 2015. Our Domestic and International segments contributed a rate decrease of 0.6% of revenue and 0.1% of revenue, respectively. For further discussion of each segment's gross profit rate changes, see Segment Performance Summary, below.
The SG&A rate decreased 1.2% of revenue in fiscal 2015. Our Domestic and International segments contributed a rate decrease of 1.1% of revenue and 0.1% of revenue, respectively. For further discussion of each segment's SG&A rate changes, see Segment Performance Summary, below.
We recorded restructuring charges of $149 million in fiscal 2014, comprised of $123 million in our Domestic segment and $26 million in our International segment. These restructuring charges resulted in a decrease in our operating income in fiscal 2014 of 0.4% of revenue. We recorded an immaterial amount of restructuring charges in fiscal 2015. For further discussion of each segment’s restructuring charges, see Segment Performance Summary, below.
Our operating income increased $306 million, and our operating income as a percent of revenue increased to 3.6% of revenue in fiscal 2015, compared to operating income of 2.8% of revenue in fiscal 2014. The increase in our operating income was due to a decrease in SG&A and restructuring charges, partially offset by LCD-related legal settlements in fiscal 2014.
Fiscal 2014 (12-month) Results Compared With Fiscal 2013 (11-month)
For purposes of this section, fiscal 2014 (12-month) represents the 12-month period ended February 1, 2014 and fiscal 2013 (11-month) represents the 11-month transition period ended February 2, 2013.
The components of the 6.2% revenue increase in fiscal 2014 (12-month) were as follows:
Extra month of revenue(1) | 7.8 | % |
Comparable sales impact | (0.6 | )% |
Net store changes | (0.5 | )% |
Impact of foreign currency exchange rate fluctuations | (0.5 | )% |
Total revenue increase | 6.2 | % |
(1) | Represents the incremental revenue in fiscal 2014, which had 12 months of activity compared to 11 months in fiscal 2013 as a result of our fiscal year-end change. |
Our gross profit rate decreased 0.5% of revenue in fiscal 2014 (12-month). Our Domestic and International segments contributed a rate decrease of 0.4% of revenue and 0.1% of revenue, respectively. For further discussion of each segment's gross profit rate changes, see Segment Performance Summary, below.
The SG&A rate decreased 0.7% of revenue in fiscal 2014 (12-month). Our Domestic and International segments contributed a rate decrease of 0.6% of revenue and 0.1% of revenue, respectively. For further discussion of each segment's SG&A rate changes, see Segment Performance Summary, below.
We recorded restructuring charges of $149 million in fiscal 2014 (12-month), comprised of $123 million in our Domestic segment and $26 million in our International segment. These restructuring charges resulted in a decrease in our operating income in fiscal 2014 (12-month) of 0.4% of revenue. We recorded $415 million of restructuring charges in fiscal 2013 (11-month), which included $1 million of inventory write-downs recorded in cost of goods sold. Our Domestic and International segments recorded $328 million and $87 million of restructuring charges, respectively, in fiscal 2013 (11-month). The restructuring charges recorded in fiscal 2013 (11-month) resulted in a decrease in our operating income rate of 1.1% of revenue. For further discussion of each segment’s restructuring charges, see Segment Performance Summary, below.
Our operating income increased $1.1 billion and our operating income as a percent of revenue increased to 2.8% of revenue in fiscal 2014 (12-month), compared to an operating income of 0.2% of revenue in fiscal 2013 (11-month). The increase in our operating income was due to a decrease in goodwill impairments and restructuring charges, as well as LCD-related legal settlements and additional operating income from an extra month of activity in fiscal 2014 (12-month) compared to fiscal 2013 (11-month).
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Segment Performance Summary
Domestic
The following table presents selected financial data for our Domestic segment for each of the past three fiscal years ($ in millions):
12-Month | 12-Month | 11-Month | ||||||||||
Domestic Segment Performance Summary | 2015 | 2014 | 2013 | |||||||||
Revenue | $ | 36,055 | $ | 35,831 | $ | 33,222 | ||||||
Revenue % gain (decline)(1) | 0.6 | % | 7.9 | % | (2.6 | )% | ||||||
Comparable sales % gain (decline)(2) | 1.0 | % | (0.4 | )% | (1.7 | )% | ||||||
Gross profit | $ | 8,080 | $ | 8,274 | $ | 7,789 | ||||||
Gross profit as a % of revenue | 22.4 | % | 23.1 | % | 23.4 | % | ||||||
SG&A | $ | 6,639 | $ | 7,006 | $ | 6,728 | ||||||
SG&A as a % of revenue | 18.4 | % | 19.6 | % | 20.3 | % | ||||||
Restructuring charges | $ | 4 | $ | 123 | $ | 327 | ||||||
Goodwill impairments | $ | — | $ | — | $ | 3 | ||||||
Operating income | $ | 1,437 | $ | 1,145 | $ | 731 | ||||||
Operating income as a % of revenue | 4.0 | % | 3.2 | % | 2.2 | % | ||||||
Selected Online Revenue Data: | ||||||||||||
Online revenue as a % of total segment revenue | 9.8 | % | 8.5 | % | 7.2 | % | ||||||
Comparable online sales % gain(2) | 16.7 | % | 19.8 | % | 11.4 | % | ||||||
(1) The revenue % decline for fiscal 2013 (11-month) is compared to the 12-month fiscal year 2012.
(2) Comparable online sales gain is included in the total comparable sales gain (decline) above.
The following table reconciles our Domestic segment stores open at the end of each of the last three fiscal years:
Fiscal 2013 (11-Month) | Fiscal 2014 | Fiscal 2015 | ||||||||||||||||||
Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | ||||||||||||||
Best Buy | 1,056 | — | (1 | ) | 1,055 | — | (5 | ) | 1,050 | |||||||||||
Best Buy Mobile stand-alone | 409 | 12 | (15 | ) | 406 | 1 | (40 | ) | 367 | |||||||||||
Pacific Sales | 34 | — | (4 | ) | 30 | — | (1 | ) | 29 | |||||||||||
Magnolia Audio Video | 4 | — | — | 4 | — | (2 | ) | 2 | ||||||||||||
Total Domestic segment stores | 1,503 | 12 | (20 | ) | 1,495 | 1 | (48 | ) | 1,448 | |||||||||||
Fiscal 2015 Results Compared With Fiscal 2014
Domestic segment revenue increased in fiscal 2015, primarily driven by comparable sales growth of 1.0%. Excluding the 0.5% of revenue estimated benefit associated with the classification of the new mobile carrier installment billing plans, comparable sales increased 0.5%. Online revenue was $3.5 billion, and we experienced comparable online sales growth of 16.7% due to: (1) improved inventory availability made possible by the chain-wide rollout of our ship-from-store capability that was completed in January 2014; (2) higher average order value; and (3) increased traffic driven by greater investment in online digital marketing.
Fiscal 2015 was also the first full year under the credit card agreement, the term of which started in September 2013. At the beginning of the year we estimated that we would generate $150 million to $200 million less credit card revenue in fiscal 2015. However, revenue earned decreased by only $7 million compared to fiscal 2014, as we experienced significantly better performance than expected, particularly in the fourth quarter. The impact of our credit card agreement on our revenue is substantially the same as the impact on our gross profit and operating income.
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The components of the 0.6% revenue increase in the Domestic segment in fiscal 2015 (12-month) were as follows:
Comparable sales impact | 0.9 | % |
Non-comparable sales(1) | (0.2 | )% |
Net store changes | (0.1 | )% |
Total revenue increase | 0.6 | % |
(1) | Non-comparable sales reflects the impact of revenue streams not included within our comparable sales calculation, such as credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers. |
The net store changes did not have a material impact on our revenue in fiscal 2015, as the majority of closures occurred in the fourth quarter and related to our small-format Best Buy Mobile stand-alone stores. The closing of small-format Best Buy Mobile stores have a significantly smaller impact given their smaller size and limited category focus compared to our large-format stores.
The following table presents the Domestic segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal 2015 and 2014:
Revenue Mix Summary | Comparable Store Sales Summary | ||||||||||
12 Months Ended | 12 Months Ended | 12 Months Ended | 12 Months Ended | ||||||||
January 31, 2015 | February 1, 2014 | January 31, 2015 | February 1, 2014 | ||||||||
Consumer Electronics | 31 | % | 30 | % | 3.7 | % | (5.6 | )% | |||
Computing and Mobile Phones | 47 | % | 48 | % | (0.6 | )% | 4.7 | % | |||
Entertainment | 9 | % | 8 | % | 4.5 | % | (16.3 | )% | |||
Appliances | 7 | % | 7 | % | 7.5 | % | 16.7 | % | |||
Services | 5 | % | 6 | % | (11.1 | )% | 0.2 | % | |||
Other | 1 | % | 1 | % | n/a | n/a | |||||
Total | 100 | % | 100 | % | 1.0 | % | (0.4 | )% | |||
The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
• | Consumer Electronics: The 3.7% comparable sales increase was primarily due to growth in televisions, with strong growth in ultra HD television. This was partially offset by declines in DVD/Blu-ray players, as online streaming continues to increase, and cameras, as device convergence with smartphones and tablets continued. |
• | Computing and Mobile Phones: The 0.6% comparable sales decline primarily resulted from a significant decrease in tablets due to industry declines. This decline was partially offset by an increase in sales of computers, as well as an increase in sales of mobile phones driven by the introduction of mobile carrier installment billing plans and higher year over year selling prices. Excluding the impact of installment billing, mobile phone comparable sales declined. |
• | Entertainment: The 4.5% comparable sales increase was driven primarily by gaming sales from the new platforms launched in the fourth quarter of fiscal 2014, partially offset by the continuing declines in movies and music as consumers continue to shift from physical media to online streaming and downloads. |
• | Appliances: The 7.5% comparable sales gain was a result of strong performance throughout fiscal 2015 due to effective promotions, the addition of appliance specialists in select stores and the positive impact of Pacific Kitchen & Home store-within-a-store concepts. |
• | Services: The 11.1% comparable sales decline was primarily due to lower mobile repair revenue and lower sales of extended warranty plans driven by lower attach rates. |
Our Domestic segment experienced a decrease in gross profit of $194 million, or 2.3%, in fiscal 2015 compared to fiscal 2014. The most significant driver of the decrease was $264 million of LCD-related legal settlements that we received in the second quarter of fiscal 2014 and, to a lesser extent, $50 million of LCD settlements received in the first quarter of fiscal 2014. Excluding these LCD settlements, we experienced an increase in gross profit of $120 million, and the gross profit rate increased 0.2% of revenue. The primary drivers of the gross profit rate increase were: (1) the benefit from the realization of our Renew Blue cost reductions and other supply chain cost containment initiatives (including initiatives related to returns, replacements and damages); (2) a more structured and analytical approach to pricing, notably in the fourth quarter; and (3) increased revenue in higher-margin large-screen televisions. These increases were offset by a mix shift into lower-margin gaming and computing categories and a highly competitive promotional environment in tablets.
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Our Domestic segment's SG&A decreased $367 million, or 5.2%, in fiscal 2015 compared to fiscal 2014. In addition, the SG&A rate decreased by 1.2% of revenue compared to the prior year. The decreases in SG&A and SG&A rate were primarily driven by the realization of Renew Blue cost reduction initiatives and the benefit from tighter expense management throughout the company. These declines were partially offset by Renew Blue investments in online growth and our in-store experience, as well as higher incentive compensation.
Our Domestic segment recorded $4 million of restructuring charges in fiscal 2015 and incurred $123 million of restructuring charges in fiscal 2014. The restructuring charges had an immaterial impact on our operating income rate in fiscal 2015 and resulted in a decrease in our operating income rate in fiscal 2014 of 0.3% of revenue. Refer to Note 4, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our Domestic segment’s operating income increased $292 million, or 0.8% of revenue, in fiscal 2015 compared to fiscal 2014. The increase was driven by lower SG&A, a comparable sales gain and lower restructuring charges, partially offset by the decrease in gross profit from the prior-year LCD settlements described above.
Fiscal 2014 (12-month) Results Compared With Fiscal 2013 (11-month)
For purposes of this section, fiscal 2014 (12-month) represents the 12-month period ended February 1, 2014 and fiscal 2013 (11-month) represents the 11-month transition period ended February 2, 2013.
During fiscal 2014 (12-month), we made substantial progress against our Renew Blue priorities. First, we exceeded our original Renew Blue annualized cost reduction target. Second, we made progress stabilizing our comparable store sales and operating income rate. In our Domestic segment, comparable stores were nearly flat for fiscal 2014 (12-month). Domestic operating income increased in fiscal 2014 (12-month); however, this was driven by LCD-related legal settlements and lower restructuring charges. Excluding these items, our operating income rate decreased primarily due to a lower gross profit rate, which was only partially offset by cost reduction initiatives and tighter expense management.
The components of the 7.9% revenue increase in the Domestic segment in fiscal 2014 (12-month) were as follows:
Extra month of revenue(1) | 8.2 | % |
Net store changes | (0.2 | )% |
Comparable sales impact | (0.1 | )% |
Total revenue increase | 7.9 | % |
(1) | Represents the incremental revenue in fiscal 2014, which had 12 months of activity compared to 11 months in fiscal 2013 as a result of our fiscal year-end change. Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information. |
The decrease in revenue from net store changes was primarily due to the closure of 47 large-format Best Buy branded stores in the second and third quarter of fiscal 2013 (11-month). The opening and closing of small-format Best Buy Mobile stores had a significantly smaller impact given their smaller size and limited category focus compared to our large-format stores.
The following table presents the Domestic segment's revenue mix percentages and comparable store sales percentage changes by revenue category in fiscal 2014 (12-month) and 2013 (11-month):
Revenue Mix Summary | Comparable Store Sales Summary | ||||||||||
12 Months Ended | 11 Months Ended | 12 Months Ended | 11 Months Ended | ||||||||
February 1, 2014 | February 2, 2013 | February 1, 2014 | February 2, 2013 | ||||||||
Consumer Electronics(1) | 30 | % | 32 | % | (5.6 | )% | (8.0 | )% | |||
Computing and Mobile Phones(1) | 48 | % | 45 | % | 4.7 | % | 7.4 | % | |||
Entertainment | 8 | % | 10 | % | (16.3 | )% | (21.4 | )% | |||
Appliances | 7 | % | 6 | % | 16.7 | % | 10.1 | % | |||
Services | 6 | % | 6 | % | 0.2 | % | 0.8 | % | |||
Other | 1 | % | 1 | % | n/a | n/a | |||||
Total | 100 | % | 100 | % | (0.4 | )% | (1.7 | )% | |||
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(1) | In fiscal 2014, e-Readers were moved from the "Consumer Electronics" revenue category to "Computing and Mobile Phones" to reflect the continued convergence of their features with tablets and other computing devices. |
The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
• | Consumer Electronics: The 5.6% comparable sales decline was primarily due to industry declines driven by device convergence with smartphones and tablets, which has negatively impacted sales of digital imaging products, particularly compact cameras and camcorders, MP3 devices and accessories, and GPS navigation products. |
• | Computing and Mobile Phones: The 4.7% comparable sales gain primarily resulted from growth in mobile phones in the first three quarters of fiscal 2014 (12-month), which was partially due to successful promotions and an increased sales mix into higher-priced smartphones. In addition, we experienced a comparable store sales gain in computing driven by growth in the second half of fiscal 2014 (12-month) as a result of improved inventory availability. |
• | Entertainment: The 16.3% comparable sales decline was driven primarily by weak gaming sales in the first three quarters as consumers awaited the launch of new platforms in the fourth quarter of fiscal 2014 (12-month), as well as declines in movies and music as consumers continue to shift from physical media to digital consumption. |
• | Appliances: The 16.7% comparable sales gain was a result of strong performance throughout fiscal 2014 (12-month) due to effective promotions, the addition of appliance specialists in select stores, the expansion of the small appliances category and the positive impact of Pacific Kitchen & Home store-within-a-store concepts. |
• | Services: The 0.2% comparable sales gain was primarily due to growth in mobile phone repair services, offset by a decline in warranty services due to the prior-year benefit from a periodic profit sharing payment that was earned based on the long-term performance of our externally managed extended service plan portfolio that did not recur in fiscal 2014 (12-month). |
Our Domestic segment experienced an increase in gross profit of $485 million, or 6.2%, in fiscal 2014 (12-month) compared to fiscal 2013 (11-month), driven by the extra month of activity. Excluding the extra month, gross profit declined due to a decline in the gross profit rate and lower revenue. The 0.3% of revenue decrease in the gross profit rate resulted primarily from a greater investment in price competitiveness and increased product warranty-related costs associated with higher claims frequency in mobile phones. These items were partially offset by LCD-related legal settlements, the realization of Renew Blue cost reductions and other supply chain cost containment initiatives and the accelerated recognition of previously deferred revenue associated with our prior credit card agreement.
Our Domestic segment's SG&A increased $278 million, or 4.1%, in fiscal 2014 (12-month) compared to fiscal 2013 (11-month). Excluding the extra month of activity, SG&A decreased primarily from the realization of our Renew Blue cost reduction initiatives, tighter expense management throughout the company and, to a lesser extent, the impact of store closures in fiscal 2013 (11-month). These decreases were partially offset by Renew Blue investments, including optimization of our retail floor space and the re-platforming of and functionality enhancements to bestbuy.com. These factors also contributed to the 0.7% of revenue decline in the SG&A rate.
Our Domestic segment recorded $123 million of restructuring charges in fiscal 2014 (12-month), primarily related to employee termination benefits as a result of Renew Blue cost reduction initiatives. These restructuring charges resulted in a decrease in our operating income in fiscal 2014 (12-month) of 0.3% of revenue. In fiscal 2013 (11-month) our Domestic segment recorded restructuring charges of $328 million, which included $1 million of inventory write-downs included in cost of goods sold. The restructuring charges related to our Renew Blue and first quarter fiscal 2013 U.S. restructuring activities and consisted primarily of facility closure costs, employee termination benefits and asset impairments. These restructuring charges resulted in a decrease in our operating income in fiscal 2013 (11-month) of 1.0% of revenue. Refer to Note 4, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our Domestic segment’s operating income increased $414 million, or 1.0% of revenue, in fiscal 2014 (12-month) compared to fiscal 2013 (11-month). Excluding the extra month of activity, operating income increased primarily due to lower SG&A expenses and a decrease in restructuring, partially offset by lower gross profit as described above.
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International
The following table presents selected financial data for our International segment for each of the past three fiscal years ($ in millions):
12-Month | 12-Month | 11-Month | ||||||||||
International Segment Performance Summary | 2015 | 2014 | 2013 | |||||||||
Revenue | $ | 4,284 | $ | 4,780 | $ | 5,030 | ||||||
Revenue % decline(1) | (10.4 | )% | (5.0 | )% | (13.7 | )% | ||||||
Comparable sales % decline | (3.5 | )% | (5.1 | )% | (9.1 | )% | ||||||
Gross profit | $ | 967 | $ | 1,125 | $ | 1,234 | ||||||
Gross profit as a % of revenue | 22.6 | % | 23.5 | % | 24.5 | % | ||||||
SG&A | $ | 953 | $ | 1,100 | $ | 1,177 | ||||||
SG&A as a % of revenue | 22.2 | % | 23.0 | % | 23.4 | % | ||||||
Restructuring charges | $ | 1 | $ | 26 | $ | 87 | ||||||
Goodwill impairments | $ | — | $ | — | $ | 611 | ||||||
Operating income (loss) | $ | 13 | $ | (1 | ) | $ | (641 | ) | ||||
Operating income (loss) as a % of revenue | 0.3 | % | — | % | (12.7 | )% | ||||||
(1) The revenue % decline for fiscal 2013 (11-month) is compared to the 12-month fiscal year 2012.
The following table reconciles our International segment stores open at the end of each of the last three fiscal years:
Fiscal 2013 (11-Month) | Fiscal 2014 | Fiscal 2015 | ||||||||||||||||||
Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | ||||||||||||||
Canada | ||||||||||||||||||||
Future Shop | 140 | — | (3 | ) | 137 | 1 | (5 | ) | 133 | |||||||||||
Best Buy | 72 | — | — | 72 | — | (1 | ) | 71 | ||||||||||||
Best Buy Mobile stand-alone | 49 | 7 | — | 56 | — | — | 56 | |||||||||||||
Mexico | ||||||||||||||||||||
Best Buy | 14 | 3 | — | 17 | 1 | — | 18 | |||||||||||||
Express | 1 | 1 | — | 2 | 3 | — | 5 | |||||||||||||
Total International segment stores | 276 | 11 | (3 | ) | 284 | 5 | (6 | ) | 283 | |||||||||||
Fiscal 2015 Results Compared With Fiscal 2014
Our International segment experienced a decrease in revenue of 10.4% primarily driven by the negative impact of foreign currency exchange rate fluctuations, a comparable sales decline of 3.5%, and the loss of revenue from store closures in Canada.
The components of the International segment's 10.4% revenue decrease in fiscal 2015 (12-month) were as follows:
Impact of foreign currency exchange rate fluctuations | (6.4 | )% |
Comparable sales impact | (3.4 | )% |
Net store changes | (0.9 | )% |
Non-comparable sales(1) | 0.3 | % |
Total revenue decrease | (10.4 | )% |
(1) | Non-comparable sales reflects the impact of revenue streams not included within our comparable store sales calculation, such as certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable. |
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The net closure of large-format stores in Canada over the past 12 months contributed to the decrease in revenue associated with net store changes in our International segment in fiscal 2015. The addition of large and small-format stores in Mexico partially offset this decrease.
The following table presents the International segment's revenue mix percentages and comparable store sales percentage changes by revenue category in fiscal 2015 and 2014:
Revenue Mix Summary | Comparable Store Sales Summary | ||||||||||
12 Months Ended | 12 Months Ended | 12 Months Ended | 12 Months Ended | ||||||||
January 31, 2015 | February 1, 2014 | January 31, 2015 | February 1, 2014 | ||||||||
Consumer Electronics | 30 | % | 29 | % | (5.1 | )% | (9.7 | )% | |||
Computing and Mobile Phones | 49 | % | 50 | % | (2.8 | )% | (1.7 | )% | |||
Entertainment | 9 | % | 10 | % | (5.2 | )% | (9.3 | )% | |||
Appliances | 5 | % | 5 | % | (0.5 | )% | (1.5 | )% | |||
Services | 6 | % | |||||||||